From complexity to clarity: unraveling the determinants of annual report readability and tone in an emerging market

This study investigates the determinants of annual report readability and tone among non-financial firms listed on the Colombo Stock Exchange in Sri Lanka, spanning from 2017 to 2022. Utilizing a dataset of 1087 firm-year observations across 189 firms, we examine how board and firm characteristics influence readability and tone as distinct outcomes of corporate disclosure strategies. Our analysis employs the FOG, SMOG, and FRES indices for readability and the Loughran and McDonald (J Finance 69(4):1643–1671, 2014. 10.1111/jofi.12162) dictionary for tone, complemented by an examination of the natural logarithm of word count to assess report length. The study reveals that larger board sizes and gender diversity are associated with higher readability and a more positive tone, suggesting that diverse governance structures enhance disclosure quality. Conversely, CEO duality is linked to more complex reports with reduced readability, aligning with concerns over strategic obfuscation in leadership-concentrated firms. Firm characteristics such as size and profitability also significantly affect report readability and tone, with larger and more profitable firms producing more readable and positively toned disclosures. The findings indicate that readability and tone are independently shaped by governance and financial attributes rather than interacting within the same disclosure strategy. This research contributes to the literature by providing empirical evidence on corporate disclosure determinants in an emerging market context, offering insights into the role of governance structures and firm attributes in shaping the clarity and sentiment of financial reporting.