The Effect of Financial Reporting Readability on Debt Capacity of Firms listed in Tehran Stock Exchange
Subject Areas : • Emerging technology in the field of Accounting and its future
Mohammad Imani Barandagh
1
*
,
leyla rezaei
2
,
milad rahimi
3
1 - Associate Professor, Department of Accounting, Zanjan branch, Zanjan, Iran
2 - M.A. of Accounting, Payam Noor University (PNU), Tehran, Iran
3 - Department of Accounting, Esfahan branch, Esfahan, Iran
Keywords: Attracting Creditors' Trust, Capital Structure, Debt Capacity, Information Asymmetry, Financial Reporting Readability Criteria,
Abstract :
Objective: The purpose of this research is to track the effect of readability of financial reporting on debt capacity. Methodology: In order to achieve the objectives of the research, 123 companies listed in Tehran Stock Exchange (TSE) during the years 2016-2022 were selected by systematic elimination model. Multiple linear regression based on consolidated data was used for hypothesis testting. the fog index was used for evaluating of readability of financial reporting and also debt capacity was measured with model developed by Frank and Goyal (2009). Results: The finding showed positive and significant effect of readability of financial reporting on debt capacity. Innovation: This research develops theoretical foundations of previous research by providing empirical evidence of the consequences of language style and readability of financial reporting in emerging markets such as Iran. Keywords: Attracting Creditors' Trust, Capital Structure, Debt Capacity, Information Asymmetry, Financial Reporting Readability Criteria. JEL Classification: M41، H63
Aghaei, M. A., Fateri, A., & Weysihesar, S. (2021). The Effect of Political Connections with the Government on the Relationship between CEO Power and Capital Structure in Companies. Accounting and Social Interests, 11(3), 1-31 (In Persian).
Ajina, A., Danielle, S., & Lakhal, F. (2016). Corporate disclosures, information asymmetry and stock-market liquidity in France. The Journal of Applied Business Research, 31(4), 223-238.
Aldoseri,M. M, Melegy, M. M. A. (2023). Readability of Annual Financial Reports, Information Efficiency, andStock Liquidity: Practical Guides From the Saudi Business Environment. Information Sciences Letters An International Journal . Inf. Sci. Lett. 12, No. 2, 813-821.
Ayuningtyas, E.S., Harymawan, I. (2022). The Effect of Voluntary Risk Management Disclosure and Risk Management Committee on Firm Value . Journal of Theoretical and Applied Management (Jurnal Manajemen Teori dan Terapan), 15(3), (2022).
Bai, X., Dong, Y., & Hu, N. (2019). Financial report readability and stock return synchronicity. Applied Economics, 51(4), 346-363.
Berger, P. (2011). Challenges and opportunities in disclosure research: A discussion of 'the financial reporting environment: Review of the recent literature'. Journal of Accounting and Economics, 51(1-2), 204-218.
Bhat, K., Chen, S. Chen, Y., & Jebran, Kh. (2020). Debt capacity, debt choice, and underinvestment problem: Evidence from China. Economic Research-Ekonomska Istrazivanja , 33(1) , 267-287.
Bonsall, S.B., & Miller, B.P. (2017). The impact of narrative disclosure readability on bond ratings and the cost of debt. Review of Accounting Studies, 22(2), 608-643.
Boubaker, S., Gounopoulos, D., & Rjiba, H. (2019). Annual report readability and stock liquidity. Financial Markets, Insitutions and Instruments, 28(2), 159-186.
Chen, Ch., Hanlon, D., Khedmati, M., & Wake, J. (2023). Annual report readability and equity mispricing. Journal of Contemporary Accounting & Economics, 19 (3), December 2023, 100368.
Courtis, K. (2004). Corporate annual report graphical communication in Hong Kong: Effective or misleading? The Journal of Business Communication, 34, 269- 288.
Dadashi, I., & M. Norouzi. (2020). Investigating the Mediating Effect of Financial Reporting Readability on the Relationship between Earnings Management and Cost of Capital. Journal of Accounting Knowledge, 11(1),135-157 (In Persian).
Daryaei, A., & Aimeni, M. (2023). Financial reporting readability and cost of capital: emphasizing the role of financial reporting quality. financial accounting Knowledge, 10 (36), 133-161. [In Persian).
De Franco, G., Hope, O., Vyas, D., & Zhou, Y. (2015). Analyst report readability. Contemporary Accounting Research, 32, 76-104.
Denis, D.J. (2011). Financial flexibility and corporate liquidity. Journal of Corporate Finance, 17(3), 667-674.
Easley, D., & O'Hara, M. (2004). Information and the cost of capital. The Journal of Finance, 59, 1553-1583.
Elliott, B., Asay, S., & Rennekamp, K. (2018). Firm performance, reporting goals and language choices in narrative disclosures. Journal of Accounting and Economics, 65(2), 380-398.
Ertugrul, M., Lei, J., Qiu, J., & Wan, C. (2017). Annual report readability, tone ambiguity, and the cost of borrowing. Journal of Financial and Quantitative Analysis, 52(2), 811-836.
Fang, X., Yutao Li., Baohua, X., & Zhang, W. (2014). The effect of annual report readability on cost of debt. Canadian academic accounting association (CAAA). Available at SSRN: https://ssrn.com/abstract=2538251.
Frank, M.Z., & Goyal, V.K. (2009). Capital Structure Decisions :Which Factors are Reliebly Important?. Financial Management, 38(1),1-37.
Gregory, R. (2020). Political Risk and Financial Flexibility in BRICS Countries. The Quarterly Review of Economics and Finance, 78(C), 166-174.
Hasan, M.M., & Habib, A. (2020). Readability of narrative disclosures, and corporate liquidity and payout policies. International Review of Financial Analysis, 68, 1-15.
Lambrinoudakis, C. Skiadopoulos, G., & Gkionis, K. (2019). Capital Structure and Financial Flexibility: Expectations of future shocks. Journal of Banking & Finance, 104, 1-18.
Lawrence, A. (2013). Individual investors and financial disclosure. Journal of Accounting and Economics, 56, 130–147.
Lemmon, M.L., & Zender, J.F. (2010). Debt capacity and tests of capital structure theories. Journal of Financial and Quantitative Analysis, 45(5), 1161-1187.
Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45 (2–3), 221–247.
Li, K., Ramos, F., & Rogo, R. (2018). Earnings management and annual report readability. Journal of Accounting and Economics, 63, 1–25.
Mahdavi, R., Azinfar, K., Dadashei, A., & Barzegar, GH. (2022). Investigating the impact of readability of financial report on commercial credit with emphasis on the role of management ability in companies listed on Tehran Stock Exchange, Scientific Quarterly Journal of Islamic Economics and Banking, 30, 195-220 (In Persian).
Miller, B. (2010). The effects of reporting complexity on small and large investor trading. Accounting Review, 85, 2107-2143.
Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.
Peng He, W., Lepone, A., & Leung, H. (2013). Information asymmetry and the cost of equity capital. International Review of Economics and Finance, 27, 611-620.
Pourrezaei. V., Rotami. V., & Shabanzadeh, M. (2017). The effect of companies spare debt capacity on the cost of equity capital in companies Listed in Tehran Stock Exchange. UCT Journal of Management and Accounting Studies, 3(3), 491-500 (In Persian).
salmanian, M., vakili fard. H.R., hamidian. M ., sarraf. F., & darabi, R. (2018). Provide a Financial Limit Forecast Model (Case study: State Companies Accepted in Tehran Stock Exchange) . Journal of Governmental Accounting,4 (2), 93-104 (In Persian).
Rahmanian Koushkaki, A., Alahiari, A., Bagherzadeh Hooshmandi, K., & Mehravar , M. (2023). The Impact of Audit Committee on the Relationship between Financial Reporting Readability and Specific Volatility of Stock Returns. Journal Emerging Technologies in Accounting, 1(1), 67-78 (In Persian).
Ramezanpour, S., Zolfaghari, M., & Zarei, R. (2021). The relationship between Operating Cash Flows and the Dynamic Optimal Capital Structure Spee: The Role of Corporate Governance. Accounting and Social Interests, 11(1), 61-76 (In Persian).
Rezaei Pitenoei, Y., & safari gerayli, M. (2019). Financial reporting readability and the likelihood of fraudulent financial reporting. Financial accounting research, 10(4), 43-58(In Persian).
Rjiba, H., Saadi, s., Boubaker, S., & Xiaoya (Sara) Ding. (2021). Annual report readability and the cost of equity capital. Journal of Corporate Finance, 67, 101902
Stickney. C. P., Brown, P. R., & Wahlen, J. M. (2007). Financial Reporting Financial Statement Analysis, and Valuation: A Strategic Perspective, 6 thed., Thomson South-Western, Meson, OH.
Souza, J., Rissatti, J.C., Rover, S., & Borba, J.S. (2019). The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics. Research in International Businessand Finance, 48, 59-74.
Volberda, H. W. (1998). Building the Flexible Firm: How to Remain Competitive. Oxford, Oxford University Press.
Xu, Q., Fernando, G., Tam, K., & Zhang, W. (2020). Financial report readability and audit fees: a simultaneous equation approach. Managerial Auditing Journal, 35(3), 345-372.
Yin, S, T., Chevapatrakul, K. Y. (2022). The causal effect of improved readability of financial reporting on stock price crash risk: Evidence from the Plain Writing Act of 2010. Economics Letters.https://doi.org/10.1016/j.econlet.2022.110614.Volume 216, July 2022, 110614
Zhang, Z. (2013). Tax Shield, Bankruptcy Cost and Optimal Capital Structure. In Finance-Fundamental Problems and Solutions:71-108.Springer Berlin Heidelberg.