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Article
Publication date: 27 January 2022

Nadia Smaili, Anne Marie Gosselin and Julien Le Maux

This paper draws on prior studies on the readability of corporate financial disclosures to discuss why readability should be a concern for firms. Guidance and…

Abstract

Purpose

This paper draws on prior studies on the readability of corporate financial disclosures to discuss why readability should be a concern for firms. Guidance and recommendations are offered to help firms improve their financial disclosures.

Design/methodology/approach

The authors base their analysis on the management and accounting literature on readability.

Findings

This paper presents the main causes and consequences of complexity in corporate disclosures and identifies four disclosure writing styles: obfuscation, informativeness, deception and avoidance. This paper suggests that firms concerned about the readability of their communications use a balanced strategy and proposes some practical actions for its implementation.

Originality/value

This paper makes several contributions by offering insights into questions that should be raised by top management and the board of directors, including: Why care about readability? What are the causes and consequences of low readability? What strategies can we adopt and how should we implement them?

Details

Journal of Business Strategy, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0275-6668

Keywords

Article
Publication date: 5 December 2022

Minyoung Noh and Jimi Park

This study aims to examine how a firm’s strategic emphasis on value appropriation over value creation is associated with the readability of narrative disclosures in annual reports.

Abstract

Purpose

This study aims to examine how a firm’s strategic emphasis on value appropriation over value creation is associated with the readability of narrative disclosures in annual reports.

Design/methodology/approach

This study examines the effect of the strategic emphasis on annual report readability based on a total of 45,273 US firm-year (5,754 unique firms) observations for the period from 1994 to 2018. Strategic emphasis is measured as advertising expenses minus research and development expenses, scaled by sales and Bog index and various measures, such as the FOG, KINCAID and FLESCH index, are used to measure the annual report readability.

Findings

The authors find that the strategic emphasis on value appropriation over value creation is positively related to firms’ annual report readability. In addition, the positive effect of the strategic emphasis on value appropriation over value creation on annual report readability is more pronounced with high managerial ability.

Practical implications

With the continual effort of Securities and Exchange Commission regulation and IFRS updates to improve narrative disclosures, it is meaningful to provide evidence showing how managers shape narratives in annual reports by highlighting good news with easy-to-understand words, but also may establish a barrier to understanding by choosing to use long and complex words depending on their strategic emphasis.

Originality/value

The evidence suggests that a strategic emphasis between value appropriation and value creation and managerial ability is an important factor in shaping the readability of annual reports, which contributes to the management, accounting and finance literature that investigates the relationship between resource deployment (i.e. strategic emphasis) and textual properties of corporate financial disclosures (i.e. readability).

Details

Pacific Accounting Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 25 October 2022

Kun Yu and Priya Garg

This study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related…

Abstract

Purpose

This study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness.

Design/methodology/approach

The authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing.

Findings

The authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports.

Originality/value

Overall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.

Details

Review of Accounting and Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 13 September 2022

Wenzhang Sun, Jiawei Zhu and Xuhui Wang

The purpose of this study is to investigate the impact of board secretaries’ characteristics on annual report readability using an original method that evaluates the…

Abstract

Purpose

The purpose of this study is to investigate the impact of board secretaries’ characteristics on annual report readability using an original method that evaluates the readability of Chinese characters.

Design/methodology/approach

The authors manually collect board secretaries’ characteristics from the China Securities Market and Accounting Research database and obtain annual reports from the China Information website. Ordinary least square regression is applied to evaluate the impact, and then robustness tests and additional regression analyses are conducted.

Findings

Board secretaries’ legal-professional expertise, international expertise and role duality improve annual report readability. However, their political connections are negatively associated with it. The effect of expertise (role duality) is more pronounced for firms with lower ex ante litigation risk (board secretaries with equity holdings). Furthermore, higher readability increases the compensation of board secretaries, whereas lower readability increases their turnover. Finally, annual report readability is positively related to firm performance.

Research limitations/implications

The authors only investigate listed firms in China from 2007 to 2017 because of the difficulties of obtaining data and text mining.

Practical implications

The authors provide managerial insights for regulators aiming to establish an effective governance mechanism with Chinese characteristics. First, certain requirements for board secretaries’ expertise can improve annual report readability. Further, firms can consider appointing board members or senior executives as board secretaries to enhance disclosure quality.

Originality/value

To the best of the authors’ knowledge, this study is the first to verify the effect of board secretaries’ characteristics on disclosure quality, especially annual report readability. Moreover, this study proposes a novel measure of annual report readability for Chinese texts.

Details

Pacific Accounting Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0114-0582

Keywords

Book part
Publication date: 19 October 2020

Xin Zhao, Greg Filbeck and Ashutosh Deshmukh

Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the…

Abstract

Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the moderating effect of financial statement readability on share repurchases in response to a temporary reduction in repatriation tax. Building on prior literature, we argue that firms with excess cash overseas, despite the lack of investment opportunities, produce less readable financial statements to hide bad news. We find that firms with less readable financial statements initiated higher levels of share repurchases after the AJCA. Our results contribute to the existing literature showing (1) firms hold excess cash overseas mainly for tax reasons rather than for nontax reasons such as precautionary motives or empire-building concerns and (2) firms return excess funds to investors rather than squander the funds once the tax cost of repatriation is reduced. Firms that suffer from the overinvestment problem using hard-to-read financial statements to hide the bad news of a lack of investment opportunities are more likely to benefit from the tax cut. Our study provides timely evidence of potential firm response to the 2017 Tax Cut and Jobs Act, which permanently removes the repatriation tax.

Book part
Publication date: 14 July 2010

Cynthia M. Daily, Roger W. Dorsey and Gaurav Kumar

For several decades, a prominent movement within government and the legal profession has emphasized the use of “plain language” to improve readability in legal writing…

Abstract

For several decades, a prominent movement within government and the legal profession has emphasized the use of “plain language” to improve readability in legal writing. Plain language legal writing in U.S. Tax Court opinions is important for tax advisors and their clients for two primary reasons. First, clients value efficiency in the work of the tax advisor. A tax advisor can research a thorny legal issue more efficiently and cost-effectively if the related Tax Court opinions are written in a clear, logical, and easy-to-read manner. Second, if opinions are difficult to understand, they provide less certain authority. A degree of certainty in the tax law is important for taxpayers to plan and conduct their economic activities, whereas a lack of certainty creates confusion and an inefficient tax compliance and planning environment.

We examined the readability of the Tax Court opinions using the Flesch Reading Ease formula. Since we selected the opinions used in this study based on the same database search term, they contain similar technical content, improving comparability of readability scores. The analysis shows that as the plain language movement progressed over the years, the readability of these opinions has actually decreased.

Details

Advances in Taxation
Type: Book
ISBN: 978-0-85724-140-5

Article
Publication date: 19 August 2022

Nina Jamar

The purpose of the research was to find out if there are any differences in the readability score between abstracts published in scientific journals from library and…

Abstract

Purpose

The purpose of the research was to find out if there are any differences in the readability score between abstracts published in scientific journals from library and information science with and without an impact factor. Therefore, the author made a comparison between the readability of abstracts from one journal with (Journal of Documentation) and one journal without (Knjižnica or Library) an impact factor.

Design/methodology/approach

As a measure of readability, the Flesch Reading Ease Readability Formula was used. Then, with the help of statistical experts, a comparison of the readability scores between the abstracts of two selected journals was performed.

Findings

The results showed that some statistically important differences exist between the abstracts published in the Journal of Documentation and Knjižnica. The statistically important differences were found in the number of words and sentences in abstracts and in the readability of abstracts included in the research. Therefore, it can be said that there exists a statistically important difference between abstracts with and without an impact factor.

Originality/value

The primary purpose was to find out whether there is a statistically important difference in the readability score of abstracts with and without an impact factor in the field of library and information science. Some similar research studies have been conducted in other scientific fields.

Details

Journal of Documentation, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0022-0418

Keywords

Book part
Publication date: 18 January 2021

Gonca Güngör Göksu and Serdar Dumlupinar

In this study, various acts including regulations of public financial management, fiscal responsibility, and state budget in the selected six countries were subjected to…

Abstract

In this study, various acts including regulations of public financial management, fiscal responsibility, and state budget in the selected six countries were subjected to different readability tests, and an international comparison was made. The fiscal responsibility act of six countries – Turkey, the UK, India, Australia, Canada, and Pakistan – were included in the study and analyzed. Each country was analyzed under its official language. Since English is an official language of all of the countries except for Turkey, the authors have evaluated the fiscal responsibility acts of these countries using the following readability tests: Flesch Reading Ease, Flesch-Kincaid, Gunning-Fog, and Dale-Chall. Additionally, Public Financial Management and Control Law No. 5018 approved in Turkey was analyzed by the Ateşman Readability Test which was uniquely designed for Turkish grammar rules. The acts discussed in the study were analyzed not only as a whole but also in parts and subsections. According to the results of the study, the levels of readability of the existing laws in most of the selected countries are very difficult to understand for a university graduate. However, when the readability level of the British Budget Responsibility and National Audit Act tested as parts and subsections and a whole, it was rated at a level a university student could understand. This study analyses the readability and intelligibility of acts related to fiscal responsibility and the state budget in six selected countries, adopting Anglo-Saxon public administration model and making an inter-country evaluation. Since it is important that citizens have enough information about legislation for a citizen-oriented understanding, a legislation system that is understood by the larger part of the society is essential.

Details

Contemporary Issues in Public Sector Accounting and Auditing
Type: Book
ISBN: 978-1-83909-508-5

Keywords

Article
Publication date: 28 July 2022

Fahd Alduais

This paper aims to examine the relationship between the readability of annual reports and corporate performance in Chinese listed firms.

Abstract

Purpose

This paper aims to examine the relationship between the readability of annual reports and corporate performance in Chinese listed firms.

Design/methodology/approach

This research examined the annual report readability factors of Chinese listed companies by using a textual analysis method using Python to extract the text from the annual reports, convert it into numerical form to facilitate statistical analysis and then merge the results with data from the Chinese stock market to explain the impact on corporate performance and predict future earnings in the Chinese financial markets from 2008 to 2021.

Findings

Study findings indicate that firms with better financial reporting readability are more profitable, incur lower agency costs and have low earnings in the Chinese stock markets when readability is low (i.e. more complexity and length of annual reports). It was also found that when a listed company has a good performance, it prefers to use a short space to explain its operating and financial status. More generally, the means of the report length are short, and accounting terms are used less frequently; in the case of a poor company, the annual report is particularly long and accounting terms are more frequently used. In the context of the COVID-19 crisis, this study served as a proxy measure of returns prior to the announcement of the COVID-19 pandemic. In addition, an instrumental variable approach is used, which helps results to remain robust and control for fixed effects and potential endogeneity problems.

Research limitations/implications

Although this study’s results cannot be generalised globally because of their limited scope, they can still be generalised across non-English speaking countries. Thus, future cross-country research is encouraged to examine the textual analysis of financial reports across those countries.

Practical implications

This study conveys two messages to investors and policymakers within the Chinese market. First, investors ought to pay greater attention to the nonfinancial information contained in annual reports to improve the accuracy of their predictions regarding future firm performance. Second, Chinese policymakers are encouraged to instate a policy for the use of plain English in annual reports to make them more readable by international investors.

Originality/value

This study contributes to the paucity of research that examines English-written annual reports in non-English speaking countries by examining the readability of annual reports in the Chinese market.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 30 June 2022

Arash Arianpoor and Zahra Sahoor

This study aims to mainly explore the impact of business strategy and annual reports readability on financial reporting quality in Tehran Stock Exchange (TSE).

Abstract

Purpose

This study aims to mainly explore the impact of business strategy and annual reports readability on financial reporting quality in Tehran Stock Exchange (TSE).

Design/methodology/approach

The sample comprised 160 companies listed in TSE from 2014 to 2020. Five proxies (including two accounting-based attributes and two market-based attributes) were used to measure financial reporting quality. In this study, cost leadership and differentiation strategies were considered and Fog index was used to measure the annual report readability.

Findings

The results showed that in all methods of calculating financial reporting quality, cost leadership strategy, differentiation strategy and annual report readability had a positive and significant impact on financial reporting quality. Also, only at the high level of the differentiation strategy, the annual reports readability influenced financial reporting quality. In addition, at all levels of high and low annual report readability, cost leadership strategy affected financial reporting quality, but only in companies with a high annual report readability, the differentiation strategy affected financial reporting quality. Only for companies with a low readability, the annual report readability affected financial reporting quality.

Originality/value

To the best of the authors’ knowledge, no study had examined the impact of business strategy and annual report readability on financial reporting quality at the core of the present study. Furthermore, little was known about the strategic choices made in Iran. So, the research filled this gap in TSE. This study provided insights for policymakers to enhance the readability and reduce the complexity of annual reports.

Details

Journal of Asia Business Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1558-7894

Keywords

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