THE EFFECT OF ANNUAL REPORT READABILITY ON FINANCIAL ANALYSTS’BEHAVIOR

Year 2018, , 26 - 37, 30.03.2018

Ajina Aymen Ben Saad Sourour Msolli Badreddine

https://doi.org/10.17261/Pressacademia.2018.782

Abstract

Purpose-This article
examines a little investigated issue in France concerning the effect of the
readability of financial information upon the behavior of financial analysts.
We investigate 88 companies listed on the French CAC All between 2009 and 2014.
Readable annual reports are those that provide homogeneous, simple, clear,
readable information that is understandable by all investors.

Methodology -We
investigate 88 companies listed on the French CAC All between 2009 and 2014.
Readable annual reports are those that provide homogeneous, simple, clear,
readable information that is understandable by all investors.  To measure readability, we use the Gunning
Fog index and the Flesh Reading Ease formula. Results indicate a positive
relation between analyst following and the readability of the annual reports.
Furthermore, the number of financial analysts corresponds to the increasing
attention paid by institutional investors to companies. 

Findings- Readability reduces the agency
costs and information asymmetry between investors, which attracts financial
analysts, thus confirming the assumption of adverse selection. 

Conclusion-French companies need to issue
understandable information to the markets; this would imply using short
sentences, common words, or the active voice. The aim of such strategies is to
reduce the cognitive distance between information senders and users. 

Keywords

Annual report readability, financial analysts, Gunning Fog index, Flesh Reading Ease formula, French stock market

References

• Ackert, L., Athanassakos, G., 2003. A Simultaneous Equations Analysis of Analysts' Forecast Bias, Analyst Following, and Institutional Ownership. Journal of Business, Finance and Accounting, 30, n°7-8, p. 10-17.
• Ajina, A., Habib, A., Laouiti, M.,2013. Influence de la communication d’informations sur le comportement des analystes financiers en France. La Revue du Financier, Vol.35, 67-82.
• Ajina A., El Houcine R., Saidani W., 2015. Corporate Governance and financial analysts’ behavior in France. Revue Bancaire et Financière, Vol. 5, p. 377-384
• Ajina A., Laouiti M., Msolli B., 2016. Guiding through the Fog: Does annual report readability reveal earnings management?. Research in International Business and Finance, Vol. 38, 509-516
• Akerlof, G.A., 1970. The market for ‘lemons’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, Vol. 84(3), 488-500.
• Asquith. P., Parag, A Pathakc., Jay, R Ritter., 2005. Short interest, institutional ownership, and stock returns. Journal of Financial Economics, Vol.78 (2005), 243–276.
• Ball. R., 1992. The earnings price anomaly. Journal of Accounting and Economics, Vol.15, 2–3, 319–345.
• Beaudet, C., 2001. Clarté, lisibilité, intelligibilité des textes : un état de la question et une proposition pédagogique. Recherches en rédaction professionnelle, Vol. 1(1), 1-17.
• Beaver, W., 1968. The information content of annual earnings releases: A trading volume approach. Journal of Accounting Research, Supplement, 67-92.
• Bhattacharya, N., Black, E.L., Christensen, T.E., Mergenthaler, R.D., 2004. Empirical evidence on recent trends in pro forma reporting. Accounting Horizons, Vol. 18(1), 27-43.
• Bhushan, R., 1989. Firm characteristics and analyst following. Journal of Accounting and Economics, Vol. 11, p. 255-274.
• Biddle, G. C., Hilary, G., Verdi, R. S., 2009. How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics. Vol 48, 2–3: 112–131
• Björnsson, C.H., 1983. Readability of newspapers in 11 languages. Reading Research Quarterly, Vol. 18(4), pp. 480-497.
• Bloomfield, R. J., 2002. The ‘incomplete revelation hypothesis’ and financial reporting. Accounting Horizons, Vol.16(3), 233-243.
• Bourque, G., 1990. Des mesures de lisibilité. in Boyer, J.Y., Lebrun, M., (réd.). L'actualité de la recherche en lecture, Montréal, Association canadienne française pour l'avancement des sciences, p. 137-160.
• Boyer, J.Y., 1992. La lisibilité. Revue française de pédagogie, Vol.99, 5-14.
• Brad, B., Lehavy, R., Maureen, M.N., Brett, T., 2001.Can Investors Profit from the Prophets? Security Anlysis Recommandations and Stock Returns. The Journal of Finance, n°56.
• Brad, B., Lehavy, R., Maureen, M.N., Brett, T., 2002. Profits and Losses: Reassessing the Returns to Analysts Stock Recommandations ». Research Paper n° 1692, Graduate School of Business, Stan ford University, May.
• Brennan., Subrahmanyam, A., 1995. Investment analysis and price formation in securities markets. Journalof Financial Economics, Vol.38(3): 361–381.
• Callen, J. L., Khan, M., Lu, H., 2009. Accounting quality, stock price delay and future stock returns. Working paper, University of Toronto and Massachusetts Institute of Technology.
• Chomsky, N., 1976. Reflections on language. Temple Smith London.
• Clatworthy, M., Jones, M.J., 2001.The Effect of Thematic Structure on the Variabilité of Annual Report Readability. Accounting, Auditing & Accountability Journal, Vol. 14(3), pp. 311-326.
• Cohen, D., 2005. Financial reporting quality: determinants and economic consequences. Working Paper, New York University.
• Conquet, A., Richaudeau, F., 1973. Cinq methods de mesure de la lisibilité. Communication et Langages, n°17, pp. 5-16.
• Courtis, J.K., 1986. An Investigation into Annual Report Readability and Corporate Risk Return Relationships. Accounting and Business Reasearch, Vol. 16(64), pp. 285-294.
• Courtis, J.K., 1987. Fry, Smog, Lix and Rix: insinuations about corporate business communications. Journal of Business Communication, spring, pp. 19-27.
• Courtis, J.K., 1995. Readibility of annual reports: Western versus asian evidence. Accounting, Auditing, Accountability Journal, Vol. 8(2), 417.
• Cowles A., 1933. Can Stock Market Forecasters Forecast?. Econometrica, Volume 1, Issue 3, July.
• Dale, E., Chall, J., 1948. A formula for predicting readability. Educational Research Bulletin 27.
• Dechow, P.M., 1994. Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, Vol. 18(1), 3-42.
• Dechow, P., Ge, W., Schrand, C., 2010. Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, Vol. 50(2-3), 344-401.
• De Landsheere, G., 1963. Pour une application des tests de lisibilite de flesch a la langue francaise. Travail Humain 26.
• Desai, H., Liang, B., Singh, A., 2000. Do All-Stars Shine? Evaluation of Analyst Recommandations. Financial Analysts Journal,Volume LV I, n°3 ,May-June.
• Ehrlich, M., Charles, A., Tardieu, H., 1992. La superstructure des textes ex positifs est-elle prise en charge lors de la sélection des informations importantes?. Le résumé de texte: 183-206.
• Fama, E.F., 1970. Efficient capital markets: A review of theory and empirical work. The Journal of Finance, Vol. 25(2), 383-417.
• Fama, E., 1991. Efficient Capital Markets: II. The Journal of Finance, Volume XL VI, Issue5, December.
• Fernbach, N., 1990. La lisibilité dans la réaction juridique au Québec. Ottawa, Le Centre de promotion de la lisibilité, Centre Canadien d'information juridique.
• Flesch, R., 1948. A new readability yardstick. Journal of Applied Psychology, Vol. 32(3), 221-233.
• Flesch, R., 1974. The Art of Readable Writing, Harper & Row, New York, NY, 1974.
• Fontowicz, L., Garcia, M., 2000. L’impact informationnel des réunions d'information de la SFAF. Analyse financière, n°1 2 1, Janvier.
• Francis, J., LaFond, R., Olsson, P., Schipper, K., 2005a. The market pricing of accruals quality. Journal of Accounting and Economics, Vol.2, 295–327.
• Francis, J., Nanda, D., Olsson, P., 2005b. Voluntary disclosure, information quality, and costs of capital. Working Paper, Duke University.
• Grossman, S.J.,Hart, O.D., 1980. Takeover bids, the free-rider problem, and the theory of the corporation. The Bell Journal of Economics, Vol.11(1), 42-64.
• Gujarati, D.N., 2004. Économétrie. De Boeck Supérieur.
• Gunning, R., 1952. The Technique of Clear Writing. McGraw-Hill, New York.
• Hammami, H., 2003. Facilité de lecture des rapports annuels : Evaluation des informations comptables textuelles résultats préliminaires du context italien. Actes de l’Association Francophone de Comptabilité (AFC), Orléans, 21p.
• Harrison, C., 1980. Readability in the classroom. Cambridge University Press, Cambridge.
• Healy, P.M., PALEPU, k.G., 2001. Information asymmetry, corporate disclosure and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, Vol. 31, p. 405- 440.
• Henry, G., 1975. Comment mesurer la lisibilité. Bruxelles, Labor / Paris, Fernand Nathan.
• HOPE, K., THOMAS, W.B., WINTERBOTHAM, G., 2006. The Impact of Nondisclosure of Geographic Segment Earnings on Earnings Predictability, Journal of Accounting, Auditing & Finance, p. 323- 347.
• HOPE, O., 2003. Disclosure practices, enforcement of accounting standards and analysts’forecast accuracy: an international study. Journal of Accounting Research, Vol 41, p. 235-272.
• Hope, O. K., 2003. Firm level disclosures and the relative roles of culture and legal origin. Journal of International Financial Management & Accounting, 14:3, 218-48
• Hrshleifer, D., Teoh, S.H., 2003. Limited attention, information disclosure, and financial reporting. Journal of Accounting and Economics, Vol. 36(1-3), 337-386.
• Indjejikian, R. J., 1991. The impact of costly information interpretation on firm disclosure decisions. Journal of Accounting Research, Vol.29(2) : 277–301.
• Lereboullet, J., 2000. Quelles places financières pour demain?. Revue d'économie financière, No. 57 : p. 157-160
• Jensen, M.C., Meckling, W.H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, Vol. 3(4), 305-360.
• Jones, M.J., 1988. A Longitudinal Study of the Readability of the Chairman’s Narratives in the Corporate Reports of a UK Company. Accounting and Busines Research, Vol. 18(2), pp. 297-308.
• Julien, L.M., 2015. La lisibilité de l’information financière. Revue française de linguistique appliquée 2015/2 (Vol. XX), p. 99-113.
• Kandel, L., Moles, A., 1958. Application de l'Indice de Flesch à la langue française. Cahiers d'Études de Radio-Télévision, Flammarion, Paris, n°19, p. 252-274.
• Krische, S.D., Lee, C.M., 2000. The Information Content of Analyst Stock Recommendations. Working paper, Johnson Graduate School of Management, Cornell University
• Klare, G.R., 1963. The measurement of Readability. Iowa State University Press, Iowa.
• Labasse, B., 1999. La lisibilité rédactionnelle : Fondements et perspectives. Communication et langages 121 (1): 86-103.
• Lang, M.H., Lundholm, R.J., 1996. Corporate disclosure policy and analyst behavior. Accounting Review, Vol. 71, p. 467-492.
• Lang, M. H., Lins, K.V., Miller, D.P., 2003. ADRs, Analysts, and Accuracy: Does Cross- Listing in the U.S. Improve of Firm’s Information Environment and Increase Market Value?. Journal of Accounting Research, Vol.41, n°2, p. 317-345
• Lang, M. H., Lins, K.V., Miller, D.P., 2004. Concentrated Control, Analyst Following, and Valuation: Do Analysts Matter Most when Investors are Protected Least?. Journal of Accounting Research, Vol.42, n°3, p. 589-623
• Lehavy, R., Feng, L., Merkley, K., 2011. The effect of annual report readability on analystfollowing and the properties of their earnings forecasts. Accounting Review,Vol. 86 (3): 1087-1115.
• Lewis, N. R., Parker, L. D., Pound, G. D., Sutcliffe, P., 1986. Accounting Report Readability: the Use of Readability Techniques. Accounting and Business Reasearch, Vol.16 (63), pp. 199-213.
• Li, F., 2008. Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45-2/3, 221-247.
• Loughran, T., McDonald, B., 2010. Measuring readability in financial text. Working paper, University of Notre Dame.
• Marston, C., 1997. Firm characteristics and analyst following in the UK. The British Accounting Review, Vol. 29(4), 335-47.
• McNichols, M.F., O'Brien, P.C., 1997. Self-selection and Analyst Coverage. Journal of Accounting Research, Vol.35, p. 167-199.
• O’Brien, P., Bhushan, R., 1990. Analyst Following and Institutional Holding. Journal of Accounting Research, p. 55-76.
• Pashalian, R., Crissy, J.E.W., 1950. How readable are corporate annual report?. Journal of Applied Psychology, Vol. 34(4), pp. 244-248.
• Plumlee, M. A., 2003. The effect of information complexity on analysts’ use of that information. The Accounting Review, Vol. 78(1): 275– 296.
• Pound, G.D., 1981. A note on audit report readability. Accounting and Finance, May,pp. 45-55.
• Previts, G. J., Bricker, R. J., Robinson, T. R., Young, S. J., 1994. A content analysis of sell-side financial analysts company reports. Accounting Horizons, Vol. 8(2): 55–70.
• Rogers, R. K., Grant, J., 1997. Content analysis of information cited in reports of sell-side financial analysts. Journal of Financial Statement Analysis. Vol. 3(1): 17–30.
• Ronald, A.D., Shyam, S., 2001. Why Not Allow FASB and IASB Standards to Compete in the U.S.?. Accounting Horizons: September 2001, Vol. 15, No. 3, pp. 257-271.
• Schrand, C.M., Walther, B.R., 2000. Strategic benchmarks in earnings announcements: The selective disclosure of prior-period earnings components. Accounting Review, Vol. 75(2), 151-177.
• Schipper, K., 1991. Analysts’forecasts. Accounting Horizons, Vol. 5, p. 105-131.
• Schroder, N., GIBSON, C., 1990. Readability of Management’s Discussion and Analysis. Accounting Horizons, Vol. 4, no 4, December: 78-87
• Schroder, N., AGGARWAL, R., GIBSON, C., 1991. Financial Reporting by Japanese Firms on the NYSE: An Analysis of Linguistic Content. Management International Review, Vol.31 (3): 233-251.
• Schroder, N., GIBSON, C., 1992. Are Summary Annual Reports Successful?. Accounting Horizons, Vol. 6(2), juin : 28-37.
• Schroeder, M., 2002. SEC proposes rules to improve disclosure by public companies. Wall Street Journal _May 1_: C5.
• SEC., 1998. A Plain English Handbook: How to Create Clear SEC Disclosure Documents. U.S. Securities and Exchange Commission, Washington, DC.
• Smith, J. E., Smith, N. P., 1971. Readability: a Measure of the Performance of the Communication Function of Financial Reporting. The Accounting Revieuw, Vol. 36(3), pp. 552-561.
• Smith, M., Taffler, R., 1992a. The Chairman’s Statement and Corporate Financial Performance. Accounting and Finance, Vol. 32(2), pp. 7590.
• Smith, M., Taffler, R., 1992b. Readability and Understandability:Different Measures of the Textual Complexity of Accounting Narrative . Accounting, Auditing & Accountability Journal, Vol. 5(4), pp. 84-98.
• Soper, F.J., Dolphin, R.J., 1964. Readability and Corporate Annual Reports. The Accounting Review, Vol. 39(2), pp. 358-362.
• Sorin, N., 1996. De la lisibilité linguistique à une lisibilité sémiotique. Revue Québécoise de linguistique, Vol.25(1), 61-97.
• Stevens, W.P., Stevens, K.C. Raabe, W.A., 1983. Communications in accounting: Readability of FASB statements. Review of Business and Economic Research, Vol.19 (1), 110-118.
• Still, M.D., 1972. The Readability of Chairmen’s Statements. Accounting and Business Research, Vol. 3(9), pp. 36-39.
• Subbramanian, R., Insley, R. G., Blackwell, R. D., 1993. Performance andReadability: A Comparaison of Annual Reports of Profitable and Unprofitable Corporations. The Journal of Business Communication, vol. 30(1): 46-61.
• Thorndike, E.L., 1921. The teacher’s workbook, NY: Teacher’s College, Columbia University, New York.
• VAN NESS, B. F., VAN NESS, R. A., RICHARD, S., 2001. How well do adverse selection components measure adverse selection?. FinancialManagement, Vol. 30, p. 77-98.
• Watts, R.L., Zimmerman, J.L., 1986. Positive accounting theory. Englewood Cliffs, NJ, Prentice Hall.
• Watts, R.L., Zimmerman, J.L., 1990. Positive accounting theory: A ten-year perspective. Accounting Review, Vol.65 (1), 131-156.
• Womack, K., 1996. Do Bokerage Analysts' Recommandations Have Investment Value?. The Journal of Finance, Volume LI, Issue 1, March.
• You, H., Zhang, X., 2009. Financial reporting complexity and investor underreaction to 10-K information. Review of Accounting Studies, Vol.14 (4): 559–586
• Zamanian, M., Heydari, P., 2012. Readability of Texts: State of the Art. Theory and Practice in Language Studies, Vol. 2(1), pp. 43-53.