Seeing is Believing: Annual Report Readability and Analyst Site Visits in China

Abstract

We explore the impact of annual report complexity on analyst site visiting frequencies. Previous studies have examined the impact of regulatory sanctions or audit quality on analyst visiting frequencies but there is little evidence on the impact of qualitative information in financial disclosures on analyst visiting decisions and selections of the visiting targets. We find that analysts conduct more visits (and more timely visits) in firms with lower annual report readability. The results are robust to using alternative measures of readability, analyst visits, and timeliness of visits, and in propensity score matching or two-stage least squares specifications that address endogeneity concerns. They are also more pronounced for firms with weaker corporate governance and for firms that operate in more competitive industries. Textual analysis of the content of the investor relations activity records that companies release following analyst site visits shows that analysts are more likely to investigate information that is commonly reported in annual reports during visits to the firms with the most opaque disclosures. Our tests confirm that more readable annual reports and more analyst visits reduce information asymmetry, and establish analyst site visits as one of the important tools that analysts use in order to improve the information environment in the market.

Keywords: analysts, company visit, annual report, readability, information asymmetry

JEL Classification: G14, G24, G34, M42