The influence of business strategy on annual report readability

Edwin Kia Yang Lim, Keryn Chalmers, Dean Hanlon

Research output: Contribution to journalArticleResearchpeer-review

22 Citations (Scopus)

Abstract

Concerns about the complexity of firm disclosures have prompted regulators to initiate projects to improve the readability of annual reports. We investigate business strategy as a determinant of annual report readability. As business strategy fundamentally determines a firm's product and market domain, technology, and organizational structure, it influences a firm's operating complexity, environmental uncertainty and information asymmetry. Consequently, business strategy frames the level, wording, and complexity of disclosures. We capture a firm's business strategy based on the Miles and Snow (1978) strategic typology and measure 10-K readability with Li's (2008) Fog index. We find that firms pursuing an innovation-oriented prospector strategy have less readable 10-Ks relative to firms pursuing an efficiency-oriented defender strategy. We also find that prospectors display more negative and uncertainty tones while defenders exhibit more litigious tone in their 10-Ks. Our study provides useful insights to policy makers as it suggests that efforts to improve annual report readability may be limited for some firms given that business strategy is a fundamental determinant of readability and pronouncements accommodating different strategic orientations are not feasible.

Original languageEnglish
Pages (from-to)65-81
Number of pages17
JournalJournal of Accounting and Public Policy
Volume37
Issue number1
DOIs
Publication statusPublished - 1 Jan 2018

Keywords

  • Annual report readability
  • Business strategy
  • Fog index

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