Does Linguistic Complexity of Annual Reports Affect Corporate Leasing Decision?
57 Pages Posted: 23 Sep 2022
Date Written: September 10, 2022
In this paper, we investigate whether the linguistic complexity of annual reports is associated with firms’ lease versus buy decisions. Using a sample of 94,697 U.S. firm-year observations between 1994 and 2017, we document that annual report complexity, as measured by the BOG Index, is significantly positively associated with a firm’s operating lease ratio. In addition, we find that financially constrained and weakly governed firms with complex financial reports lease more. The results remain robust with the use of alternative measures of annual report complexity and leasing intensity, and the use of different estimation methods. Further, by employing firm fixed effects, matching and instrumental variable estimations, a difference-in-differences method with The Plain Writing Act 2010 and a regression discontinuity design with the eXtensible Business Reporting Language adoption, we find that the positive association between linguistic complexity and operating leasing is highly likely to be causal. Overall, our study shows evidence that firms with linguistically complex annual reports strategically choose to use leasing as an alternative source of funding.
Keywords: Lease-versus-buy decision, Annual report readability, Operating lease, Information asymmetry
JEL Classification: G14, G32, M41
Suggested Citation: Suggested Citation