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Guiding through the Fog: Does annual report readability reveal earnings management?

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  • Ajina, Aymen
  • Laouiti, Mhamed
  • Msolli, Badreddine

Abstract

This paper attempts to find a relationship between earnings management and annual report readability. The study was conducted on the French stock market between 2010 and 2013 and includes 163 firms listed on the CACALL shares index. We assess the readability of annual reports using the Gunning-Fog Index and earnings management is measured by discretionary accruals estimated using the models of Dechow et al. (1995) and Raman and Shahrur (2008). Our results show the existence of a positive and significant relation between the level of discretionary accounting adjustments and Fog Index. In fact, companies managing their earnings tend to make annual report readability more complex. In this way, we also find a significant link between the Fog Index and the other financial indicators of our model (Ownership dispersion, Profitability, Leverage and Firm size), so supporting our main result.

Suggested Citation

  • Ajina, Aymen & Laouiti, Mhamed & Msolli, Badreddine, 2016. "Guiding through the Fog: Does annual report readability reveal earnings management?," Research in International Business and Finance, Elsevier, vol. 38(C), pages 509-516.
    • Handle: RePEc:eee:riibaf:v:38:y:2016:i:c:p:509-516
    DOI: 10.1016/j.ribaf.2016.07.021
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    2. Sinethemba Mankayi & Frank Ranganai Matenda & Mabutho Sibanda, 2023. "An Analysis of the Readability of the Chairman’s Statement in South Africa," Risks, MDPI, vol. 11(3), pages 1-15, March.
    3. Paul, Samit & Sharma, Prateek, 2023. "Does earnings management affect linguistic features of MD&A disclosures?," Finance Research Letters, Elsevier, vol. 51(C).
    4. de Souza, João Antônio Salvador & Rissatti, Jean Carlo & Rover, Suliani & Borba, José Alonso, 2019. "The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics," Research in International Business and Finance, Elsevier, vol. 48(C), pages 59-74.
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    More about this item

    Keywords

    Earnings management; Annual report readability; French stock market;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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