Financing Needs, Earnings Manipulation And Annual Report’s Readability

The enactment of the "Securities Law" in December 2019 once again ushered in the concentrated attention and discussion on the topic of "information disclosure".Information disclosure has always been an important way to resolve information asymmetry in the capital market,and its role and value are self-evident.Judging from the form of information disclosure,the "New Securities Law" not only made mandatory requirements for financial information,but also use "succinct and clear,easy to understand" to put forward new requirements for textual information disclosure from the legal level.With the improvement of the level of text analysis technology,further interpretation of text information becomes possible.How to better identify and prevent the use of text information strategies and improve the quality of qualitative disclosure has its profound importance and necessity.Based on domestic and foreign literature on the use of readability and financing needs,this paper sorts out the mechanism of different behavior choices of companies under the motivation of the company’s external financing needs.On the basis of the readability level of the annual report,the paper analyzes the trade-offs of text-based information strategy management when the company has external financing needs from the perspective of "improving" the efficiency of information transmission and "fuzzy" negative information.Specifically,this article takes all A-share listed companies from 2007 to 2017 as the research object,studies the correlation between financing needs and readability,and also discusses the space of earnings management,the change of annual report disclosure guidelines,the nature of property rights,the level of information transparency and the degree of marketization.The moderating role of correlations further explores the mechanism of the effect of readability on financing demand.The study found that: Firstly,the financing demand is significantly positively related to the level of readability of the annual report,that is,the greater the external financing demand of the listed company,the stronger its tendency to reduce the asymmetry of information for the purpose of "improvement".Based on the action path of "financing needs-annual report legibility-financing availability",it shows the effect of positive governance.And this kind of positive correlation exists obviously under different information disclosure requirements of annual reports.Secondly,under the motivation of financing demand,the use of listed companies’ earnings management strategies and the use of text information strategies will show a synergistic effect.That is,the greater the degree of earnings management,the more likely it is to weaken the positive governance effect between financing needs and the readability of the annual report.Thirdly,the positive correlation between financing needs and the readability of the annual report is more pronounced in non-state-owned enterprises and regions with a high degree of marketization.What’s more,the level of information transparency can have a certain impact on the positive correlation between financing needs and the readability of the annual report.The research conclusions of this article have important implications for market participants such as listed companies themselves,investors and creditors,and regulators in paying attention to the disclosure of textual information,improving the efficiency of information transmission,and maintaining the efficient operation of the capital market.