Can the readability of an annual report forecast negative earnings surprises?

This study examines the relationship between the readability of an annual report and negative earnings surprises. Using logit regression, we find that less clear reports can predict unexpected negative earnings. This relationship persists even after accounting for deviations greater than 50 %. Furthermore, this effect is more pronounced for firms with less balanced shareholder equity and nonstate-owned enterprises. Our findings suggest that ambiguous disclosures can serve as early warning signals for investors, with important implications for regulatory oversight.