The impact of strategic emphasis on the readability of narrative information in annual reports

Abstract

Purpose This study aims to examine how a firm’s strategic emphasis on value appropriation over value creation is associated with the readability of narrative disclosures in annual reports. Design/methodology/approach This study examines the effect of the strategic emphasis on annual report readability based on a total of 45,273 US firm-year (5,754 unique firms) observations for the period from 1994 to 2018. Strategic emphasis is measured as advertising expenses minus research and development expenses, scaled by sales and Bog index and various measures, such as the FOG, KINCAID and FLESCH index, are used to measure the annual report readability. Findings The authors find that the strategic emphasis on value appropriation over value creation is positively related to firms’ annual report readability. In addition, the positive effect of the strategic emphasis on value appropriation over value creation on annual report readability is more pronounced with high managerial ability. Practical implications With the continual effort of Securities and Exchange Commission regulation and IFRS updates to improve narrative disclosures, it is meaningful to provide evidence showing how managers shape narratives in annual reports by highlighting good news with easy-to-understand words, but also may establish a barrier to understanding by choosing to use long and complex words depending on their strategic emphasis. Originality/value The evidence suggests that a strategic emphasis between value appropriation and value creation and managerial ability is an important factor in shaping the readability of annual reports, which contributes to the management, accounting and finance literature that investigates the relationship between resource deployment (i.e. strategic emphasis) and textual properties of corporate financial disclosures (i.e. readability).

الدور المُعدل للمنافسة فى سوق المنتج على العلاقة بين القدرة الإدارية وقابلية التقارير المالية للقراءة(باللغة الانجليزية)

“…Moreover, Noh & Park (2022) indicate that more able managers will state their superior performance in such a manner that minimizes readers' time and effort to extract relevant information because they seek to maximize their rewards. Hence, readability is more achievement with upper managerial ability.…”

Business strategy and strategic deviation in accounting, finance, and corporate governance: A review of the empirical literature

“…We have excluded studies that examine the determinants of strategy, strategic uniqueness, and strategic changes (Bednar et al, 2013; Haynes & Hillman, 2010; Oehmichen et al, 2021; Zhu & Chen, 2015) because they are mainly conducted in the Management discipline. Other papers also used quantified measure of firm's strategic orientation using alternative strategy typology (Jia, 2018; Noh & Park, 2023), we exclude those papers from our review as well. Finally, we exclude papers that used strategy as a moderating variable.…”