IFRS adoption and the readability of corporate annual reports: evidence from an emerging market

Abstract

This study aims to investigate the impact of adopting International Financial Reporting Standards (IFRS) on the readability of corporate annual reports of Saudi companies. Data have been collected for a sample of 67 companies listed on the Saudi Stock Exchange for the period 2014–2019. Statistical methods such as the independent sample t test, the Wilcoxon matched-pair test, and the multiple regression analysis have been used to examine the effect of adopting IFRS on the readability of the corporate annual report. The results of the study reveal that the adoption of IFRS has led to a decrease in the readability of the corporate annual report. The results also indicate that there is a significant impact of the company’s size and profitability on the readability of the corporate annual report, while the leverage and industry in which the company operates do not have a significant impact on the readability of the corporate annual report. Since the annual reports of Saudi companies are published in Arabic, the study is not able to use the most popular readability indexes in the literature such as the Fog Index, Gunning Fox Index, Flesch–Kincaid Grade Index, and Flesch Reading Ease Index. Instead, the study uses three readability measures appropriate to the readability of annual reports prepared in Arabic, namely report length, report size, and LIX formula. The study contributes to the global debate about the economic consequences of adopting International Financial Reporting Standards (IFRS) by examining the impact of adopting IFRS on the readability of corporate annual reports, considering that this report is the main and official communication tool between the company and its stakeholders. This study is the first study to examine the impact of adopting IFRS on the readability of corporate annual reports in Saudi Arabia as one of the emerging markets.