Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

Ertugrul, Mine; Jin, Longzhe; Qiu, Jiaping; Wan, Chi

doi:10.1017/s0022109017000187

Cited by 357 publications

(265 citation statements)

References 44 publications

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“…Similarly, ambiguity in qualitative disclosures is likely to impact audit fees. Ertugrul et al () observed a positive link between ambiguity in annual reports and future crash risk . By documenting that ambiguous financial reports are associated with more stringent credit terms, stricter bank monitoring, and the likelihood of security requirements, Ertugrul et al () also showed that more ambiguity decreases a company's perceived creditworthiness and increases its cost of borrowing.…”

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

“…Ertugrul et al () observed a positive link between ambiguity in annual reports and future crash risk . By documenting that ambiguous financial reports are associated with more stringent credit terms, stricter bank monitoring, and the likelihood of security requirements, Ertugrul et al () also showed that more ambiguity decreases a company's perceived creditworthiness and increases its cost of borrowing. Therefore, a firm's use of ambiguous words in narrative disclosures is likely to create uncertainty in information processing by auditors that enhances perceived audit risk resulting in higher audit fees…”

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

“…Given that auditors evaluate all client-specific information in pricing audit service (e.g., Simunic, 1980), narrative disclosures are likely to be used by auditors in evaluating audit risk and structuring audit fees. Prior studies document that readability, optimism, and ambiguity can effectively capture the quality of narrative disclosures because they have important market consequences, such as subsequent stock return volatility, and impact on trading volume, unexpected earnings, the cost of capital, crash risk, analyst forecast dispersion, and loan contract terms (e.g., Bonsall et al, 2017;Ertugrul et al, 2017;Feldman, Govindaraj, Livnat, & Segal, 2010;Kothari, Shu, & Wysocki, 2009;Li, 2010a;Loughran & McDonald, 2011).…”

Section: Narrative Disclosure Properties and Audit Feesmentioning

confidence: 99%

“…Based on these findings, we argue that, when examining the audit fee implication for management's disclosure strategies, researchers should treat client firms as dynamic evolving entities. Although prior studies (e.g., Ertugrul, Lei, Qiu, & Wan, 2017;Huang, Teoh, & Zhang, 2014;Loughran & McDonald, 2011 show that users of financial reports, such as investors, credit rating agencies, and financial analysts, benefit from narrative disclosures, very few studies have tested the impact of such disclosures on audit fees. 1 This is surprising, given that narrative disclosures are likely to play a vital role in an auditor's estimation of audit risk, and therefore audit fees.…”

mentioning

confidence: 99%

“…Drawing upon extant literature, we use three proxies for narrative disclosure properties: readability, optimism, and ambiguity of annual reports (e.g., Bonsall, Leone, Miller, & Rennekamp, 2017;Ertugrul et al, 2017). We rely on Dickinson's (2011) cash-flow-based approach to define the life-cycle stages.…”

mentioning

confidence: 99%

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Narrative disclosures, firm life cycle, and audit fees

2019

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This study examines the relationship between narrative disclosure properties in terms of readability, optimism, and ambiguity of annual reports and audit fees, and how the relationship changes across firms' various life‐cycle stages. Using 54,883 observations for the years from 2000 to 2016, we find that these textual disclosure properties have positive audit pricing consequences. We suggest that narrative disclosure properties play an important role in estimating audit risk, and thus in audit fees. We further posit that the audit fee consequences of these disclosure characteristics vary across different phases of a client firm's corporate life cycle. Though we observe that with a decrease in readability and an increase in optimism and ambiguity of disclosure language that audit fees increase in the introduction phase, a firm's entry to the growth phase moderates the influence of these narrative disclosure features on audit fees. However, the impact of these lexical features on audit fees increases as client firms switch (1) from the growth phase to the maturity phase and (2) from the maturity phase to the decline phase. Based on these findings, we argue that, when examining the audit fee implication for management's disclosure strategies, researchers should treat client firms as dynamic evolving entities.

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Section: Background and Hypotheses Developmentmentioning

confidence: 99%

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

Section: Narrative Disclosure Properties and Audit Feesmentioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

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Narrative disclosures, firm life cycle, and audit fees

2019

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Carbon emissions, corporate governance, and staggered boards

2022

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Carbon emissions have been identified as a major cause of global warming and are harmful to the environment. Given the seriousness of climate changes, businesses are encouraged to adopt corporate strategies to improve environmental performance. Staggered boards (or classified boards) are one of the controversial corporate governance devices being employed by corporations that protect managers from the market for corporate control. This paper explores whether staggered boards can be a useful business strategy to improve carbon emissions. Relying on a novel data set in which the presence of a staggered board is identified through advanced machine learning algorithms and textual analysis, we find that staggered boards bring about significantly worse emission performance by 10.67%. Our results corroborate the premise that staggered boards insulate self‐interested managers from market discipline and thus exacerbate agency problems, resulting in more unfavorable outcomes. Further analysis validates the results, that is, propensity score matching, entropy balancing, instrumental‐variable analysis, and generalized method of moments (GMM) dynamic panel data estimation. Importantly, we include firm fixed effects to account for unobserved heterogeneity. Our findings indicate that de‐staggered boards may help improve emission performance.

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The tone of buyer firms' annual reports and suppliers' green innovation: The spillover effects in the supply chain

Yang,

Xiao,

Gong

et al. 2024

Bus Strat Env

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Grounded in signaling theory, this study explores the effect of the tone of buyer firms' annual reports on suppliers' green innovation and investigates the factors influencing such spillover effects. We use a panel data regression method to analyze 748 paired buyer–supplier firm‐year observations of Chinese listed manufacturing firms from 2010 to 2020. We demonstrate that the tone of buyers' annual reports promotes suppliers' green innovation, showing a spillover effect on the supply chain. Furthermore, the signal strength and effectiveness may be affected by the signal environment. Specifically, buyers' power over suppliers (supply chain environment) and suppliers' industry competition (industry environment) positively moderate the spillover effects of green innovation. This study enriches signaling theory and contributes to the growing literature on green innovation in supply chain management and also provides significant implications for managers.

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Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing

Cited by 357 publications

References 44 publications

Narrative disclosures, firm life cycle, and audit fees

Narrative disclosures, firm life cycle, and audit fees

Carbon emissions, corporate governance, and staggered boards

The tone of buyer firms' annual reports and suppliers' green innovation: The spillover effects in the supply chain

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