The impact of corporate reporting readability on informational efficiency
ISSN: 1321-7348
Article publication date: 18 October 2019
Issue publication date: 15 November 2019
Abstract
Purpose
Informational efficiency is a fundamental aspect of capital market quality, and therefore, regulators, managers and practitioners attempt to find ways to improve the informational efficiency. Since prior studies primarily focus on the numerical attributes of corporate reporting, it is not yet adequately known whether or not the linguistic attributes of corporate reporting affect informational efficiency. Thus, the purpose of this paper is to examine whether corporate reporting readability (readability), as an important linguistic attribute of corporate reporting, affects informational efficiency.
Design/methodology/approach
To measure readability, this paper uses Fog index. Moreover, to measure informational efficiency, the paper uses stock return variance ratios.
Findings
The findings reveal a positive and significant association between readability and informational efficiency. Moreover, the findings show that the association of readability and informational efficiency is stronger for firms facing higher information asymmetry. The findings further document the spillover effect of readability, in the sense that the readability of economically related public firms affects a firm’s informational efficiency. Overall, the results support the arguments that readability enhances informational efficiency.
Originality/value
This study contributes to the literature by providing evidence on the internalities and externalities of readability in the context of informational efficiency. Thus, the study will be of interest to regulators, managers and practitioners, especially in emerging capital markets, who tend to find practical and easy ways to improve informational efficiency.
Keywords
Acknowledgements
The authors appreciate the helpful comments from Joseph Zhang (Associate Editor), Ameneh Bazrafshan and two anonymous referees. All errors are the authors’ own.
Citation
Hesarzadeh, R. and Rajabalizadeh, J. (2019), "The impact of corporate reporting readability on informational efficiency", Asian Review of Accounting, Vol. 27 No. 4, pp. 489-507. https://doi.org/10.1108/ARA-11-2018-0203
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited