Earnings Management and Annual Report Readability

61 Pages Posted: 12 Oct 2016

See all articles by Kin Lo

Kin Lo

University of British Columbia (UBC) - Sauder School of Business

Felipe Ramos

FUCAPE Business School

Rafael Rogo

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 1, 2016

Abstract

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 (MD&A), 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.

Keywords: Annual Report Readability, Profitability, Earnings Management, Computational Linguistics

JEL Classification: D82, G14, G18, K22, M41, M43, M45

Suggested Citation

Lo, Kin and Ramos, Felipe and Rogo, Rafael, Earnings Management and Annual Report Readability (October 1, 2016). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2848537

Kin Lo (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8430 (Phone)
604-822-9470 (Fax)

HOME PAGE: http://www.sauder.ubc.ca/Faculty/People/Faculty_Members/Lo_Kin

Felipe Ramos

FUCAPE Business School ( email )

Fernando Ferrari Avenue, 1358
Goiabeiras
Vitória, Espirtio Santo 29075-010
Brazil

Rafael Rogo

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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