Financial Reporting Readability: Managerial Choices versus Firm Fundamentals

Spanish Journal of Finance and Accounting, 2019, doi: 10.1080/02102412.2019.1668219

Posted: 22 Oct 2019

See all articles by Reza Hesarzadeh

Reza Hesarzadeh

Ferdowsi University of Mashhad

Ameneh Bazrafshan

Imam Reza International University

Javad RajabAlizadeh

Ferdowsi University of Mashhad (FUM)

Date Written: September 17, 2019

Abstract

An implicit premise of regulators and much empirical research is that financial reporting readability (readability) substantially reflects management choices. To investigate this issue, we decompose readability into its discretionary and innate components. To validate this decomposition, we examine whether these two components have different uncertainty effects. Our empirical findings show that readability is primarily the result of firm fundamentals rather than managerial choices. Furthermore, consistent with expectation, discretionary readability has a weaker uncertainty effect than innate readability. The findings are robust to a variety of additional tests. This study contributes to regulators to better assess readability and to empirical literature to construct more accurate tests.

Keywords: Quality of financial disclosures, Readability, Managerial discretion, Discretionary readability, Firm fundamentals, Uncertainty

JEL Classification: D80, G14, G32, M16, M40, M48

Suggested Citation

Hesarzadeh, Reza and Bazrafshan, Ameneh and RajabAlizadeh, Javad, Financial Reporting Readability: Managerial Choices versus Firm Fundamentals (September 17, 2019). Spanish Journal of Finance and Accounting, 2019, doi: 10.1080/02102412.2019.1668219. Available at SSRN: https://ssrn.com/abstract=3455288

Reza Hesarzadeh (Contact Author)

Ferdowsi University of Mashhad ( email )

Mashhad, 9177948974
Iran

HOME PAGE: http://Hesarzadeh.profcms.um.ac.ir/

Ameneh Bazrafshan

Imam Reza International University ( email )

Felestin Square, Mashhad, 91735553 Iran
Mashhad, 91735553
Iran

Javad RajabAlizadeh

Ferdowsi University of Mashhad (FUM) ( email )

P.O. Box 91775-1163
Mashhad
Iran

Register to save articles to
your library

Register

Paper statistics

Abstract Views
115
PlumX Metrics