The Economic Consequences Of Annual Report Readability

Annual reports of listed companies are main communication way in the capital market.The readability of annual report directly affects the efficiency and effectiveness of information transmission.For trusted responsibility view,annual report is an important reflection of management competence and business performance.Annual report is main source of information and evidences for external stakeholders to supervise and evaluate the management.Therefore,whether the readability plays an important role on corporate governance about supervising and evaluating the agent?There has been no literature discussed this significant issue.To give an insight into these issues,in this study,19,221 firm-year observations of Chinese A-share listed firms from 2001-2015 are chosen to investigate the relationship between annual report readability and corporate agency cost,where hand-collected data of file length and file size are provided as readability proxies.The results show that:(1)Under the same condition,firms with higher annual report readability have lower dual agency costs.This indicates that annual report readability contributes to the improvement of corporate governance in restraining the opportunistic behavior of insiders;(2)External auditing,internal control,securities analysts and institutional investors will strengthen the negative relationship between annual report readability and corporate agency cost.This indicates that these mechanisms are effective in mitigating agency problems.The above conclusions are robust to a series of robustness checks:simultaneous model,instrumental variable regression model,fixed-effects model,two-way cluster regression model and alternative measurement of readability and agency cost.Furthermore,we find that mutual fund,QFII,insurance fund and social security fund will more actively participate in corporate governance,therefore enhancing the inhibiting effect on agency cost.Besides,the effect of annual report readability in reducing corporate agency cost are stronger in private firms than in state-owned enterprises.This study has several contributions academically and practically.Firstly,this study enriches the research on readability.Annual report readability will affect the behaviors of external users and can improve the corporate governance.Besides,readability,an important textual property,has become popular topic in various fields.But the study on readability in Chinese context just begin.The findings have inspiration and indicative value to the research on Chinese version annual report readability.Finally,the findings provide empirical evidence for plain disclosures reform and important policy implications for regulatory in improving annual report readability.