Summary and conclusions
The problem of annual report readability has recently attracted much attention from regulators and scholars, but little is known about its economic consequences. We investigate the governance role of annual report readability from the perspective of agency costs by using 19,221 firm-year observations of Chinese A-share listed firms from 2001 to 2015, measuring readability based on hand-collected file length and file size data. We find that firms with higher annual report readability have lower agency costs both between shareholders and managers and between majority and minority shareholders, and the negative association between annual report readability and corporate agency costs is stronger in focal firms with higher external audit quality, higher internal control quality or higher analyst coverage. These findings stand up to a series of robustness checks including the simultaneous-equations model, the firm fixed-effects model, the two-way cluster regression model and alternative measurements of readability and agency costs. These results indicate that more readable annual reports may help to improve corporate information transparency and reduce the extent of information asymmetry facing external stakeholders, which enables them to evaluate corporate performance and value more accurately and monitor corporate insiders’ opportunistic behavior more efficiently. In addition, external audit and internal control are important mechanisms for improving the quality of focal firms’ accounting earnings, and security analysts are the main users of corporate annual reports. These governance mechanisms help to strengthen the effect of annual report readability on reducing corporate agency costs. We further find that the effect of annual report readability is more pronounced in NSOEs and after the implementation of the new accounting standards in 2007.
