Annual Report Readability And Earnings Response Coefficients

As the main sources of information for investors to understand the valuation of the listed companies,annual reports act as an important bridge in the capital market.Recently,the readability of annual reports has received widely attention both from theoretical and practice circles.With the advent of information era,superficial reading has been deeply affecting the way people read,and the phenomenon that thicker books are much harder to read is more and more prominent.Thus,simplified disclosure has become the basic consensus of securities regulatory institutions at home and abroad.However,in the case of China,annual reports get longer and longer,which is deteriorating the readability.Under this circumstance,what consequences will the readability of annual reports lead to and how will it affect the efficiency of information transmission in the capital market are urgent problems that need to be answered by the academia.Using 19,771 firm-year observations of Chinese A-share listed firms from 2001-2015,we empirically test the relationship between annual report readability and earnings response coefficients,where hand-collected data of file length and file size are provided as readability proxies.The results show that:(1)Firms with higher annual report readability have higher earnings response coefficients,which means that annual report readability contributes to the reflection of earnings information on stock price;(2)The more analysts following or the higher institutional ownerships,the stronger the positive relationship between annual report readability and earnings response coefficients,indicating that analysts as information intermediaries and institutional investors as professional investors strengthen the effect of annual report readability on information transmission.The above conclusions are robust to a series of robustness checks,such as fixed-effects model and change model aimed to mitigate endogeneity problems causing by missing values and reciprocal causation,respectively,two-way cluster regression model and alternative of measurement of readability and moderating variables.Furthermore,we find that among all institutional investors,it is mutual fund,QFII,social insurance fund and security fund that has positive moderating effect.Besides,we also make an explore of the structure of annual report and find that Board of Directors’ Report,an important part of nonfinancial information,interferes the efficiency of information transmission,thus weakens the positive relationship between annual report readability and earnings response coefficients.This study enriches and expands the research on annual report readability and value-relevance of earnings.In the meantime,with simplified disclosures becoming the important tendency of the reform of information disclosure regulation,the results of this empirical research provide important policy implications for improving the information disclosure regulations of Chinese listed firms and the efficiency of capital market information.