Javad Rajabalizadeh and Hannu Schadewitz
This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market…
Abstract
Purpose
This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market context characterized by voluntary IFRS adoption and the absence of Big 4 audit firms.
Design/methodology/approach
By utilizing hand-collected data from TSE-listed companies, covering 1,097 firm-year observations from 2012 to 2023, readability is assessed using three well-established indexes (Fog, Flesch–Kincaid and Simple Measure of Gobbledygook). Informational efficiency is evaluated by analyzing how stock prices align with a random walk pattern, with additional control variables including governance factors, auditor characteristics and firm-specific indicators to enhance model robustness.
Findings
The findings indicate a positive association between audit report readability and informational efficiency, suggesting that clearer and more readable audit reports help reduce information asymmetry. Control variables such as board independence and auditor tenure showed significant impacts, supporting the conclusion that governance and auditor-specific factors enhanced informational efficiency. Agency and institutional theories are used to contextualize these findings, especially within TSE’s unique regulatory environment. The study addresses endogeneity with firm fixed effects and sample selection bias through Heckman’s two-stage procedure. The absence of Big 4 auditors in Iran prompted controls for auditor size effects, supporting our findings across different audit market segments.
Research limitations/implications
Limitations include potential omitted variable bias and challenges in generalizing findings beyond the TSE. Despite applying firm fixed effects and Heckman’s two-stage procedure to control for endogeneity, some residual biases may remain.
Practical implications
For regulators, auditors and investors, these findings underscore the value of promoting readability in audit reports to improve informational efficiency, particularly in emerging markets with evolving regulatory standards.
Originality/value
By focusing on audit report readability within an emerging market lacking Big 4 presence, this study offers unique insights into how readability can foster transparency and investor confidence in regions with distinct market dynamics.
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Frederick Lindahl, Satu-Päivi Kantola and Hannu Schadewitz
This paper aims to examine whether variations in country-specific business integrity (BI) and firm-specific environmental, social and governance (ESG) dimensions can explain…
Abstract
Purpose
This paper aims to examine whether variations in country-specific business integrity (BI) and firm-specific environmental, social and governance (ESG) dimensions can explain variations in earnings quality (EQ) in Northern and Southern EU civil law countries.
Design/methodology/approach
Regarding EQ, the analysis builds on the “small gain, small loss” (SGSL) model of Burgstahler and Dichev (1997) and Burgstahler and Chuk (2015). The authors explain SGSL with the BI. Southern Europe or “Club Med” is typically associated with a less rigorous institutional regime than Northern Europe.
Findings
Results evidenced higher EQ in the Northern EU compared with the Southern EU. Furthermore, EQ is explained successfully with the Business Integrity Index (BII) and ESG. The results suggest that BII and ESG represent different dimensions, and, therefore, both should be included in the models explaining EQ.
Practical implications
The results show that the Northern EU civil law countries have higher EQ compared with the Southern EU civil law countries. The difference is explained by the BII variable. For the Southern EU, legislators and other public policy decision-makers should build up and apply tools to limit and fight corruption in those jurisdictions. The impactful elimination of corruption would, in turn, establish a firmer basis to foster ethical behavior and financial market sophistication developments.
Originality/value
The study offers additional insights on the determinants of EQ in the EU civil law countries. The prior literature has argued that, categorically, in common law countries firms engage in higher-quality reporting than those in civil law countries. The results evidence that EQ varies within the EU civil law countries; that is, a country’s BI and firm-specific ESG contribute to the explanation for EQ. A more specific explanation for the reasons in the EQ “within” civil law jurisdictions could be related to legislators and other public policy decision-makers in charge of establishing regimes and public policies supporting high-quality accounting.
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Javad Rajabalizadeh and Hannu Schadewitz
This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines…
Abstract
Purpose
This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines the effects of narcissism among both lead and review audit partners on the clarity of audit reports, considering the regulatory requirements and auditing practices within the Iranian financial reporting context.
Design/methodology/approach
This paper analyzed 2,691 firm-year observations from TSE-listed companies spanning 2011–2023, using ordinary least squares regression. Readability of audit reports was assessed using the FOG index, with the size of partners’ signatures serving as a proxy for narcissism.
Findings
The findings indicate a significant negative relationship between increased narcissism and audit report readability; higher levels of narcissism correspond with elevated FOG index scores. Narcissism in lead partners notably diminishes readability more than that of review partners. This pattern holds across various robustness checks, including alternative readability metrics, variations in auditor engagement complexity, auditor specialization, subsets of qualified audit reports and considerations for endogeneity. Audit reports for economically significant clients tend to be clearer, suggesting a preference for reputation management over yielding to client pressure. Although no direct link was established between partners’ quality and readability, a positive relationship exists between audit firm rank and partners’ narcissism. Furthermore, interactions between auditor and CEO narcissism increase report complexity, especially in contentious negotiation scenarios. Despite regulatory advancements such as International Auditing Standard 701, its moderating effects were found to be inconsequential, highlighting the persistent influence of narcissism on audit report outcomes.
Originality/value
This research expands the understanding of how auditor personality traits, particularly narcissism, affect audit outcomes. By exploring the influence of narcissism on report readability within the Iranian context, this study fills a notable gap in the literature on emerging markets and non-Western reporting environments, providing valuable insights into global audit practices.
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This study investigates the relationship between the Chief Executive Officer's (CEO) overconfidence and financial reporting complexity in Iran, a context characterized by weak…
Abstract
Purpose
This study investigates the relationship between the Chief Executive Officer's (CEO) overconfidence and financial reporting complexity in Iran, a context characterized by weak corporate governance and heightened managerial discretion.
Design/methodology/approach
The sample consists of 1,445 firm-year observations from 2010 to 2021. CEO overconfidence (CEOOC) is evaluated using an investment-based index, specifically capital expenditures. Financial reporting complexity (Complexity) is measured through textual features, particularly three readability measures (Fog, SMOG and ARI) extracted from annual financial statements. The ordinary least squares (OLS) regression is employed to test the research hypothesis.
Findings
Results suggest that CEOOC is positively related to Complexity, leading to reduced readability. Additionally, robustness analyses demonstrate that the relationship between CEOOC and Complexity is more distinct and significant for firms with lower profitability than those with higher profitability. This implies that overconfident CEOs in underperforming firms tend to increase complexity. Also, firms with better financial performance present a more positive tone in their annual financial statements, reflecting their superior performance. The findings remain robust to alternative measures of CEOOC and Complexity and are consistent after accounting for endogeneity issues using firm fixed-effects, propensity score matching (PSM), entropy balancing approach and instrumental variables method.
Research limitations/implications
This study adds to the literature by delving into the effect of CEOs' overconfidence on financial reporting complexity, a facet not thoroughly investigated in prior studies. The paper pioneers the use of textual analysis techniques on Persian texts, marking a unique approach in financial reporting and a first for the Persian language. However, due to the inherent challenges of text mining and feature extraction, the results should be approached with caution.
Practical implications
The insights from this study can guide investors in understanding the potential repercussions of CEOOC on financial reporting complexity. This will assist them in making informed investment decisions and monitoring the financial reporting practices of their invested companies. Policymakers and regulators can also reference this research when formulating policies to enhance financial reporting quality and ensure capital market transparency. The innovative application of textual analysis in this study might spur further research in other languages and contexts.
Originality/value
This research stands as the inaugural study to explore the relationship between CEOs' overconfidence and financial reporting complexity in both developed and developing capital markets. It thereby broadens the extant literature to include diverse capital market environments.