IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v55y2023ipas1544612323002672.html
   My bibliography  Save this article

Organizational capital and readability of financial reports

Author

Listed:
  • Panta, Humnath
  • Panta, Ayush

Abstract

This study uses pooled OLS technique to examine the effect of organizational capital on the readability of 10-Ks reports of a large sample of US firms from 1993 to 2019. The main finding reveals that firms with higher organizational capital report more readable 10-Ks. The effect of organizational capital on readability continues to be significant even after SEC's Plain English Rules of 1998. Our findings also reveal that organizational capital lessens the adverse effects of loss on the readability of annual reports. Overall, our findings reveal the importance of organizational capital in how a company disseminates information in its annual reports.

Suggested Citation

  • Panta, Humnath & Panta, Ayush, 2023. "Organizational capital and readability of financial reports," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002672
    DOI: 10.1016/j.frl.2023.103895
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323002672
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2023.103895?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lo, Kin & Ramos, Felipe & Rogo, Rafael, 2017. "Earnings management and annual report readability," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 1-25.
    2. Jeff L. McMullin & Bryce Schonberger, 2020. "Entropy-balanced accruals," Review of Accounting Studies, Springer, vol. 25(1), pages 84-119, March.
    3. Bonsall, Samuel B. & Leone, Andrew J. & Miller, Brian P. & Rennekamp, Kristina, 2017. "A plain English measure of financial reporting readability," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 329-357.
    4. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    5. Marwick, Alex & Hasan, Mostafa Monzur & Luo, Tianpei, 2020. "Organization capital and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 68(C).
    6. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    7. Carol Corrado & Charles Hulten & Daniel Sichel, 2009. "Intangible Capital And U.S. Economic Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 661-685, September.
    8. Boubaker, Sabri & Hasan, Mostafa Monzur & Habib, Ahsan, 2022. "Organization capital, tournament incentives and firm performance," Finance Research Letters, Elsevier, vol. 46(PB).
    9. Xu, Qiao & Fernando, Guy D. & Tam, Kinsun, 2018. "Executive age and the readability of financial reports," Advances in accounting, Elsevier, vol. 43(C), pages 70-81.
    10. Cory A. Cassell & Lauren M. Cunningham & Ling Lei Lisic, 2019. "The readability of company responses to SEC comment letters and SEC 10-K filing review outcomes," Review of Accounting Studies, Springer, vol. 24(4), pages 1252-1276, December.
    11. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    12. Francis, Bill & Mani, Suresh Babu & Sharma, Zenu & Wu, Qiang, 2021. "The impact of organization capital on firm innovation," Journal of Financial Stability, Elsevier, vol. 53(C).
    13. Hasan, Mostafa Monzur & Uddin, Mohammad Riaz, 2022. "Do intangibles matter for corporate policies? Evidence from organization capital and corporate payout choices," Journal of Banking & Finance, Elsevier, vol. 135(C).
    14. Hasan, Mostafa Monzur & Lobo, Gerald J. & Qiu, Buhui, 2021. "Organizational capital, corporate tax avoidance, and firm value," Journal of Corporate Finance, Elsevier, vol. 70(C).
    15. Li, Peixin & Li, Frank Weikai & Wang, Baolian & Zhang, Zilong, 2018. "Acquiring organizational capital," Finance Research Letters, Elsevier, vol. 25(C), pages 30-35.
    16. Hongkang Xu & Trung H. Pham & Mai Dao, 2020. "Annual report readability and trade credit," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 19(3), pages 363-385, July.
    17. Cui, Huijie & Dai, Lixuan & Zhang, Yanan, 2021. "Organization Capital and Corporate Innovation: Evidence from China," Finance Research Letters, Elsevier, vol. 43(C).
    18. Baruch Lev & Suresh Radhakrishnan, 2005. "The Valuation of Organization Capital," NBER Chapters, in: Measuring Capital in the New Economy, pages 73-110, National Bureau of Economic Research, Inc.
    19. Hwang, Byoung-Hyoun & Kim, Hugh Hoikwang, 2017. "It pays to write well," Journal of Financial Economics, Elsevier, vol. 124(2), pages 373-394.
    20. Ertugrul, Mine & Lei, Jin & Qiu, Jiaping & Wan, Chi, 2017. "Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 811-836, April.
    21. Andrea L. Eisfeldt & Dimitris Papanikolaou, 2013. "Organization Capital and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 68(4), pages 1365-1406, August.
    22. Samuel B. Bonsall & Brian P. Miller, 2017. "The impact of narrative disclosure readability on bond ratings and the cost of debt," Review of Accounting Studies, Springer, vol. 22(2), pages 608-643, June.
    23. Rjiba, Hatem & Saadi, Samir & Boubaker, Sabri & Ding, Xiaoya (Sara), 2021. "Annual report readability and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 67(C).
    24. Hongkang Xu & Trung H. Pham & Mai Dao, 2020. "Annual report readability and trade credit," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 19(3), pages 363-385, July.
    25. Wen Chen & Robert Inklaar, 2016. "Productivity spillovers of organization capital," Journal of Productivity Analysis, Springer, vol. 45(3), pages 229-245, June.
    26. Shroff, Nemit & Verdi, Rodrigo S. & Yost, Benjamin P., 2017. "When does the peer information environment matter?," Journal of Accounting and Economics, Elsevier, vol. 64(2), pages 183-214.
    27. Najah Attig & Sadok El Ghoul, 2018. "Organization Capital and the Cost of Equity Financing in Medium‐Sized Manufacturing Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 35(3), pages 1616-1644, September.
    28. Gao, Mingze & Leung, Henry & Qiu, Buhui, 2021. "Organization capital and executive performance incentives," Journal of Banking & Finance, Elsevier, vol. 123(C).
    29. Stephen Dempsey & David Harrison & Kimberly Luchtenberg & Michael Seiler, 2012. "Financial Opacity and Firm Performance: The Readability of REIT Annual Reports," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 450-470, August.
    30. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-461, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zareie, Mobina & Attig, Najah & El Ghoul, Sadok & Fooladi, Iraj, 2024. "Firm digital transformation and corporate performance: The moderating effect of organizational capital," Finance Research Letters, Elsevier, vol. 61(C).
    2. Panta, Humnath & Narayanasamy, Arun & Panta, Ayush, 2023. "Organizational capital and credit ratings," Finance Research Letters, Elsevier, vol. 57(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Panta, Humnath & Narayanasamy, Arun & Panta, Ayush, 2023. "Organizational capital and credit ratings," Finance Research Letters, Elsevier, vol. 57(C).
    2. Provaty, Sagira Sultana & Hasan, Mostafa Monzur & Luo, Le, 2024. "Organization capital and GHG emissions," Energy Economics, Elsevier, vol. 131(C).
    3. Kalelkar, Rachana & Xu, Hongkang & Nguyen, Duong & Chen, Zheng, 2024. "Generalist CEOs and the readability of the 10-K report," Advances in accounting, Elsevier, vol. 65(C).
    4. Li, Hong-Quan & Yang, Yang & Xue, Feng-Wan & Liu, Zhi-Yi, 2024. "Annual report readability and trade credit financing: Evidence from China," Research in International Business and Finance, Elsevier, vol. 69(C).
    5. de Souza, João Antônio Salvador & Rissatti, Jean Carlo & Rover, Suliani & Borba, José Alonso, 2019. "The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics," Research in International Business and Finance, Elsevier, vol. 48(C), pages 59-74.
    6. Chan, Konan & Guo, Re-Jin J. & Wang, Yanzhi A. & Yang, Hsiao-Lin, 2022. "Organization capital and analyst coverage," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 81-105.
    7. Sun, Li, 2023. "Asset redeployability and readability of annual report," Research in International Business and Finance, Elsevier, vol. 64(C).
    8. Mousa, Gehan A. & Elamir, Elsayed A.H. & Hussainey, Khaled, 2022. "The effect of annual report narratives on the cost of capital in the Middle East and North Africa: A machine learning approach," Research in International Business and Finance, Elsevier, vol. 62(C).
    9. Ling Tuo & Yu (Tony) Zhang & Zhenfeng Liu & Ruixue Du, 2019. "Business Education of CEO-CFO and Annual Report Readability," Review of Economics & Finance, Better Advances Press, Canada, vol. 17, pages 16-34, August.
    10. Leye Li & Louise Yi Lu & Yi Wang & Yangxin Yu, 2023. "Workforce diversity and financial statement readability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1599-1631, April.
    11. Muhammad Nadeem, 2022. "Board Gender Diversity and Managerial Obfuscation: Evidence from the Readability of Narrative Disclosure in 10-K Reports," Journal of Business Ethics, Springer, vol. 179(1), pages 153-177, August.
    12. Drago, Carlo & Ginesti, Gianluca & Pongelli, Claudia & Sciascia, Salvatore, 2018. "Reporting strategies: What makes family firms beat around the bush? Family-related antecedents of annual report readability," Journal of Family Business Strategy, Elsevier, vol. 9(2), pages 142-150.
    13. Chen, Chen & Hanlon, Dean & Khedmati, Mehdi & Wake, James, 2023. "Annual report readability and equity mispricing," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    14. Akhilesh Bajaj & Lori N. K. Leonard & Li Sun & Zhenze Xing, 2023. "Corporate social responsibility and annual report reading difficulty," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1393-1428, May.
    15. Soliman, Marwa & Ben-Amar, Walid, 2022. "Corporate social responsibility orientation and textual features of financial disclosures," International Review of Financial Analysis, Elsevier, vol. 84(C).
    16. Jia, Jing & Li, Zhongtian, 2022. "Risk management committees and readability of risk management disclosure," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    17. Ahsan Habib & Mostafa Monzur Hasan, 2020. "Business strategies and annual report readability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2513-2547, September.
    18. Hasan, Mostafa Monzur & Lobo, Gerald J. & Qiu, Buhui, 2021. "Organizational capital, corporate tax avoidance, and firm value," Journal of Corporate Finance, Elsevier, vol. 70(C).
    19. Hasan, Mostafa Monzur & Habib, Ahsan, 2020. "Readability of narrative disclosures, and corporate liquidity and payout policies," International Review of Financial Analysis, Elsevier, vol. 68(C).
    20. Fahd Alduais & Nashat Ali Almasria & Abeer Samara & Ali Masadeh, 2022. "Conciseness, Financial Disclosure, and Market Reaction: A Textual Analysis of Annual Reports in Listed Chinese Companies," IJFS, MDPI, vol. 10(4), pages 1-22, November.

    More about this item

    Keywords

    Organizational capital; Readability; 10-Ks; Annual reports;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002672. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.