Icing On The Cake Or Covering The Truth?

In the annual report regularly published by the listed company,in addition to the detailed disclosure of financial statement data information,it also contains a large amount of text information.The most important part is directors' report.It not only contains company's annual operating descriptions,but also the outlook for the future,which has abundant information content.It is particularly noticed by market participants such as ordinary investors,financial analysts and financial media.But the information is not audited,which is helpful with managers' manipulation.When firm performance is good,managers maybe let investors understand operating status and further plans clearly.However,when it is poor,managers maybe conceal some information by text.Is it true in fact?Can market participants distinguish different texts?How will they react?This is what I mainly want to explore.Firstly,referring to some factors that affect readability of Chinese texts mentioned in the existing literature,and combining the experience of reading several directors' reports.I extract five dimensions about readability:whether the meaning is clear,whether it is easy to understand,whether the content is detailed,whether the tone is clear,and whether the layout is beautiful.Next.I collect 29091 data about readability of directors' reports from 2001 to 2016 by manually scoring,and I construct readability index to study the motivation of management's manipulating readability and the economical impact of readability differences.At the same time,file size and the average sentence length used aboard widely are selected as comparisons to examine whether foreign indicators are applicable to Chinese text.1 find:(1)the directors' report with higher firm performance is easier to read;(2)positive accruals manipulation will weaken the positive correlation between readability and performance,and negative accruals manipulation will strengthen the correlation;(3)when the directors' report is easier to read,short-term volatility of stock price is smaller;(4)more readable directors' report is associated with smaller dispersion in analyst earnings forecasts and more analysts following.This paper makes possible several contributions.First,I attempt to construct a readability index for Chinese text,which is different from commonly readability measures in English text.Empirically,I find the robustness of readability index is superior to foreign measures,such as file size and average sentence length,which enriches existing research about readability.Second,by adding accruals manipulation,I find positive accruals manipulation will weaken the positive correlation between readability and performance,and negative accruals manipulation will strengthen the correlation.The conclusion shows the difference towards the direction of earnings management will affect this relationship,which reminds investors that companies with good performance but unreadable texts may have implemented positive earnings management.Third,practically,the self-built readability index gets basic support by empirical results,which proves the selection of the readability measurement dimension is relatively effective.At present.text disclosure of the director's report is uneven,and the supervision is not yet clear.Our readability index may be used to make clearer supervision rules as reference.