Does Linguistic Complexity of Annual Reports Affect Corporate Leasing Decision?

56 Pages Posted: 23 Sep 2022 Last revised: 17 May 2023

See all articles by Danlin Chi

Danlin Chi

University of Queensland - Business School

Hasibul Chowdhury

University of Queensland - Business School

Nicolas Eugster

University of Queensland - Business School

Jiayi Zheng

University of Queensland - Business School

Date Written: May 17, 2023

Abstract

In this paper, we investigate whether the linguistic complexity of annual report 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 annual report complexity and leasing intensity. Further, by employing a difference-in-differences (DID) method with The Plain Writing Act (PWA) 2010 and a regression discontinuity design (RDD) with XBRL 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

Chi, Danlin and Chowdhury, Hasibul and Eugster, Nicolas and Zheng, Jiayi, Does Linguistic Complexity of Annual Reports Affect Corporate Leasing Decision? (May 17, 2023). Available at SSRN: https://ssrn.com/abstract=4214982 or http://dx.doi.org/10.2139/ssrn.4214982

Danlin Chi

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Hasibul Chowdhury

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Nicolas Eugster (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Jiayi Zheng

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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