Proximity to broad bond rating change and annual report readability

Purpose - The purpose of this study is to examine the impact of proximity to broad bond rating change on annual report reading difficulty. Design/methodology/approach - We use regression analysis to examine the association between proximity to broad bond rating change and reading difficulty of annual report. Findings - Using a large panel sample with 11,767 firm-year observations representing 1,474 unique US companies from 1994 to 2016, we find a significant positive relation between proximity to broad bond rating change and annual report reading difficulty, which suggests that the annual reports of borderline firms are difficult for stakeholders to read and understand. Originality/value - By investigating whether and how borderline firms manipulate readability of annual reports, our study contributes to bond rating research in finance literature and disclosure quality research in accounting literature. To the best of our knowledge, this study is perhaps the first empirical study that directly tests the link between proximity to broad bond rating change and annual report readability. In particular, the majority of prior studies concentrate on the economic consequences of annual report readability, but few studies investigate the determinants of readability. Therefore, examining the impact of proximity to broad bond rating change on readability contributes to a more comprehensive understanding of annual report readability.