Annual report readability, agency costs, firm performance: an investigation of Oman's financial sector

Abstract

PurposeThe readability of annual reports is an important feature that determines the quality of communication between a firm and its stakeholders. Extant literature has demonstrated that readability characteristics of annual reports are crucial in facilitating the investor's ability to process and analyze information, resulting in higher firm performance and lower agency costs. This study examines the relationship between annual report readability, agency costs and the firm performance of listed financial sector companies in Oman.Design/methodology/approachUsing a sample of 150 firm-year observations of listed financial sector companies on the Muscat Securities Market (MSM) over the period 2014 to 2018, a panel regression analysis is used, along with the system generalized method of moments (GMM) estimation to address endogeneity concerns. The readability of annual reports is proxied by the length of the annual report, the Flesch reading ease and the Flesch–Kincaid index.FindingsThe ordinary least squares (OLS) results suggest that readability proxied by the length of the annual report has no significant relationship with agency cost, return on assets (ROA) or stock returns. The OLS results are confirmed through the system GMM estimation model for agency costs, Tobin's Q and stock returns. Easier-to-read annual reports measured by the Flesch reading ease demonstrate high asset utilization ratio and Tobin's Q. These results emphasize Flesch reading ease measure in explaining the economic significance of agency cost and Tobin's Q. In contrast, difficult-to-read annual reports are observed for firms with high ROA.Research limitations/implicationsThe study is limited to the financial sector. Its generalizability could be extended to a similar sector or countries with features similar to Oman. Future studies on readability could be extended to other sectors of Oman, and financial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures also including cross-country comparisons.Practical implicationsFinancial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures.Originality/valueWhile the study extends prior literature on readability, agency costs and firm performance, it is also one of the first to examine the financial sector of an emerging country, namely, Oman. The study supports the obfuscation hypothesis through the association of readability measure with agency cost. Unlike prior research that has focused on common computational linguistic literature, this study uses three proxies for readability to assess information quality.

Business strategy, intellectual capital, firm performance, and bankruptcy risk: evidence from Oman's non-financial sector companies

“…According to Fama (1991), the semi-strong form of efficient market hypothesis suggests stock prices incorporate and reflect all available public information. Thus, prior studies have used stock return as a suitable measure of firm performance (Dalwai et al , 2021; Yang et al , 2021; Chandra et al , 2019). As seen in columns (1) and (8) strategy, A-VAIC, HCE, SCE, and CEE have no significant association with stock return.…”

“…Lastly, there are clear differences in the norms of developing, developed, and emerging countries. Oman distinguishes itself from the developed countries based on size, information efficiency, volatility, and market structure (Dalwai et al , 2021; Pillai and Al-Malkawi, 2018). From an emerging market perspective, this contextualized study on the impact of business strategy and intellectual capital efficiency is one of the first contributing to Oman's business landscape.…”

Tone, readability and financial risk: the case of GCC banks

“…(2021a) examine the association between the readability of annual reports, agency costs and performance for a sample of listed financial sector firms in Oman. Dalwai et al. (2021a) study sample includes insurance, investment, finance and bank corporations in Oman and its findings are generalizable to the financial sector firms in the GCC region.…”

“…It has been documented that managers use different linguistic styles (tone and/or readability) when textually reporting the firm's achievements (Brennan et al. , 2009; Dalwai et al. , 2021a, b; Huang et al.…”

“…, 2020), Pakistan (Ahmed, 2016) and Brazil (Nicolay and Oliveira, 2019). In the Gulf region, Dalwai et al. (2021a) examine the association between the readability of annual reports, agency costs and performance for a sample of listed financial sector firms in Oman.…”