Journal
JOURNAL OF ACCOUNTING & ECONOMICS
Volume 63, Issue 1, Pages 1-25Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jacceco.2016.09.002
Keywords
Annual report readability; Profitability; Earnings management; Computational linguistics
Categories
Funding
- Chartered Professional Accountants of BC
- Social Sciences and Humanities Research Council
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We explore how the readability of annual reports varies with earnings management. Using the Fog Index to measure readability (Li, 2008), and focusing on the management discussion and analysis section of the annual report (MUM), we predict and find that firms most likely to have managed earnings to beat the prior year's earnings have MD&As that are more complex. This disruption of the overall pattern of readability increasing with the level of earnings found in Li (2008) challenges the ontological explanation that good news is inherently easier to communicate, and shows that obfuscation contributes to making disclosures more complex. Crown Copyright (C) 2016 Published by Elsevier B.V. All rights reserved.
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