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Political corruption and annual report readability: evidence from the United States

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  • Hongkang Xu
  • Mai Dao
  • Jia Wu
  • Hua Sun

Abstract

This study examines the association between the political corruption of a local government and the readability of firms’ annual reports. Based on a sample of 12,742 firm-year observations during the 2006–2014 period, the study reveals that firms located in more corrupt regions tend to disclose less readable financial reports. Our additional analyses reveal that the level of annual report readability is lower for firms located in more corrupt regions, regardless of the firms’ level of return on assets. We also find that firms located in more corrupt regions and having more able managers are more likely to obfuscate information in annual reports. The results imply firms’ effort to minimise rent extraction from corrupt government officials. A further test shows that firms in more corrupt regions are more likely to report less readable Management Discussion and Analysis (MD&A) section of annual reports. This paper extends the prior literature on annual report readability and political corruption. The paper also provides additional evidence to the mixed results on the management's obfuscation behaviour related to the readability of financial disclosures. The findings may be of interest to regulators seeking out factors influencing firms’ readability of annual reports.

Suggested Citation

  • Hongkang Xu & Mai Dao & Jia Wu & Hua Sun, 2022. "Political corruption and annual report readability: evidence from the United States," Accounting and Business Research, Taylor & Francis Journals, vol. 52(2), pages 166-200, February.
    • Handle: RePEc:taf:acctbr:v:52:y:2022:i:2:p:166-200
    DOI: 10.1080/00014788.2020.1815516
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    Cited by:

    1. Costa, Mabel D. & Habib, Ahsan, 2023. "Local creative culture and audit fees," The British Accounting Review, Elsevier, vol. 55(2).
    2. 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).
    3. Vismaya Gangadharan & Lakshmi Padmakumari, 2024. "Fogging the firm performance: an empirical examination of the annual report readability in India," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 21(2), pages 211-226, June.
    4. Li, Hong-Quan & Yang, Yang, 2024. "Can the readability of an annual report forecast negative earnings surprises?," Finance Research Letters, Elsevier, vol. 62(PA).
    5. Sun, Li & Johnson, Grace & Bradley, Wray, 2022. "CEO power and annual report reading difficulty," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    6. Li, Xiaoyu & Zou, Lin, 2024. "Does mandating narrative disclosure of innovation help unveil the curtain of R&D expenditure? Evidence from regulation change in China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Chowdhury, Hasibul & Estreich, Timothy & Hossain, Ashrafee & Zheng, Jiayi, 2024. "U.S. Political corruption and labor investment (in)efficiency," Global Finance Journal, Elsevier, vol. 60(C).
    8. Ahsan Habib & Mabel D' Costa & Ahmed Khamis Al‐Hadi, 2023. "Consequences of local social norms: A review of the literature in accounting, finance, and corporate governance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 3-45, March.

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