A Study On The Effect Of Annual Report Readability On The Corporate Performance

Based on agency theory background,the annual report of listed companies is an important mechanism of communication.Impression management noted that the management,based on a reduction in agency costs,manipulates the readability of the annual report.And �management obfuscation hypothesis�assumes that,when the company's performance is poor,the management intentionally obscures the information and reduces the readability because the market can react incompletely to information contained in report.Therefore,the management has incentive to make strategic report to reduce the transmission of the bad performance.However,the relationship between the readability and performance may not be significant.First of all,the annual report contains a large number of information related to the present and the past performance.Therefore,in order to hide the bad information,the management write more complex reports may not work.Second,if good performance is attributed to management's strategic report,the management may not want to make the annual report easy to read.Therefore,the relationship between the readability and corporate performance is not clear,which is worth studying.In recent years,the CSRC pays more attention to lexical propertied in annual report due to the lawsuits about disclosures.The CSCR has raised a claim about disclosure for the listed companies since the beginning of 2015.Hence,it is worth to discussing the readability of Chinese annual reports.However,prior studies are based on foreign annual reports,and domestic annual reports are rarely referred.However,there are many differences in report preparation and laws at home and abroad,so it is necessary to study Chinese annual reports.In this paper,Chinese annual reports from2012 to 2015 are selected as the sample.The financial sector and the real estate industry have been deleted,and 130 a year is selected randomly according to the industry profile.At the same time,the samples of ST,*ST,financial data and thecompany which has been delisted are excluded,end up with 464 samples.And learn from Loughran and McDonald(2014)in a measure of readability,with a logarithmic of file size as the alternative.Based on this,the relationship between readability and corporate performance is explored.The paper also added the lagged annual report of the listed company,and established the long-time-run model to explore the influence.Finally,carry on the robustness test.The following conclusions are drawn: First,the readability of the current annual report is negatively correlated with corporate performance.In other words,the lower the readability,the better the company's performance,and vice versa.Second,annual report readability has hysteretic effect on corporate performance.And there is a positive relation between the readability of hysteretic annual reports and performance.In other words,,the lower the readability of hysteretic annual reports,the worse company performance,and vice versa.The result verifies the theory that capital market may react with a delayed incorporation of information contained in annual report.According to the conclusions,this paper puts forward the following suggestions :First,the mandatory use of "plain language".Praise companies which do well and punish those bad ones.At the same time,clear investor litigation channels and measures;Second,establish and improve the "plain language" guide,which can learn from America;Third,enhance the monitoring and disclose the non-conforming firm;Fourth,the shareholders should sign a contract with management about disclose readability and regulate the lexical properties,in this way can reduce the manipulative space.