Mostafa Kamal Hassan, Bassam Abu-Abbas and Hany Kamel
The authors investigate the impact of disclosure tones and financial risk on the readability of annual reports in the banking sector. The authors also examine the moderating…
Abstract
Purpose
The authors investigate the impact of disclosure tones and financial risk on the readability of annual reports in the banking sector. The authors also examine the moderating effect of banks' financial risk on the tone–readability relationship.
Design/methodology/approach
This study relies on the agency theory and the social psychology theory to formulate its testable hypotheses and explain the empirical findings. It uses a sample of 390 bank-year observations from banks listed in the Gulf Cooperation Council (GCC) Stock Exchanges during the period 2014–2019. It also employs random effect regressions to analyze the data and to examine the reverse causality/endogeneity in order to obtain robust findings.
Findings
This study’s results demonstrate that easy (difficult) to read annual reports is significantly associated with positive (negative) tone. Bank managers characterized as “too positive/optimistic” and banks with higher financial risks publish less readable annual reports. The results also show that the interaction between negative tone and a bank's financial risk is inversely associated with reading difficulty, indicating that managers prepare easy text to clarify causes of their banks’ high risks, yet they communicate this easy text with a negative tone that reflects their feelings/emotions towards the financial risks of their banks.
Practical implications
This study’s findings call for the use of a plain English text that bears a neutral tone and urge financial analysts to go beyond the financial aspects of annual reports. They also stimulate policymakers to draft policies, which ensure the presence of audit committee members who possess a broad expertise to uncover the linguistic issues embedded in the annual reports.
Originality/value
To the best of the authors' knowledge, this is the first study dedicated to exploring the tone–readability association in the GCC's banking sector.
Details
Keywords
Mostafa Kamal Hassan, Bassam Abu Abbas and Samy Nathan Garas
This paper aims to examine the relationship between the readability of annual reports and corporate performance in Qatari listed firms while controlling for a firm’s competitive…
Abstract
Purpose
This paper aims to examine the relationship between the readability of annual reports and corporate performance in Qatari listed firms while controlling for a firm’s competitive position, governance structure and specific features such as size, age and industry type.
Design/methodology/approach
This study relies on both agency theory and legitimacy theory to develop testable hypotheses. It uses a sample of 126 firm-year listed companies in the Qatar Stock Exchange to test obfuscation in the annual reports through examining the association between the readability of Narrative Disclosures (NDs) and corporate profitability, financial risk and agency costs for the period from 2014-2016.
Findings
The findings show that firms with higher annual report readability are more profitable and have lower agency costs, which is an indication of the existence of “obfuscation.” Qatari firms may use narrative complexity as a disclosure strategy to enhance their image and consequently maintain their social legitimacy.
Research limitations/implications
Although the study findings suffer from limited global generalization, they can be generalized across Gulf Cooperation Council countries. Thus, future cross-country research is encouraged.
Practical implications
The findings encourage Qatari policymakers to instate a policy for “Plain English” writing to make NDs easy to read by international investors.
Originality/value
This study is one of very few studies that examines the readability of annual reports in emerging market economies, i.e. Qatar. The study contributes to the paucity of research that examines English-written annual reports in non-English speaking countries.