The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics

Managers can intentionally reduce the readability of narrative accounting disclosures by making them more complex. This assumption is theoretically called the management obfuscation hypothesis. This study investigates the relationship between readability of these narratives and financial performance, arguing that managers elaborate more complex narrative accounting disclosures when performance is poor. Using panel data for a main sample of 1643 firm-years and a secondary sample of 1297 firm-years for the period from 2010 to 2016, it was found that managers deliberately add complexity to narrative accounting disclosures in order to hide information about poor performance. The findings are consistent with the management obfuscation hypothesis and contribute to the understanding that the complex narratives are used as subterfuge for hiding negative financial information. It has also been shown that complex past information has a negative impact on the firms' current performance. Therefore, it seems reasonable to conclude that there is an agreement that complex narratives are less effective and costlier in the analysis process. Our results assist capital market participants to demand more understandable and useful information for decision making.