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The Impact of Firm Performance on Annual Report Readability

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 Journal of Economics, Business, and Accountancy Ventura Vol. 22, No. 3, Desember 2019 – Maret 2020, pages 444 – 454

The Impact of Firm Performance on Annual Report Readability:

Evidence from Listed Firms in Ghana

Shuibin Gu*, Regina Naa Amua Dodoo

School of Finance, Jiangsu University, Zhenjiang, Jiangsu Province, China.

ARTICLE INFO ABSTRACT

Article history: Annual report readability is necessary to prevent the imbalanced flow of information
Received 20 February 2019 and enhance stakeholders’ view of the firm. For that reason, it is crucial to examine
Revised 30 March 2020 the factors than can affect it. This study attempts to find the impact of firm
Accepted 31 March 2020 performance on annual report readability. The study consists of 15 listed firms on the
Ghana Stock Exchange within the period 2008 to 2017. By applying the fixed and
JEL Classification: random effect method, the Hausman test was conducted to select a suitable method,
D82, G34, M41 the result based on the random effect method states that firm performance positively
relates to annual report readability. In addition, the study finds out that corporate
Key words: governance exerted a negative influence on the readability of the annual report.
Readability, Firm Performance, Finally, the study adopts F-MOLS to test Robustness which confirms the main result.
Corporate Governance, Fixed Effect, This result implies that there are other determinants and factors that influence annual
Random Effect. report readability rather than firms or managers manipulating financial reports to
win investor sentiment.
DOI:
10.14414/jebav.v22i3.2097 ABSTRAK
Annual report readability diperlukan untuk mencegah aliran informasi yang tidak
seimbang dan meningkatkan pandangan pemangku kepentingan terhadap perusahaan
Penelitian ini mencoba untuk menemukan dampak kinerja perusahaan pada annual
report readability. Penelitian ini terdiri dari 15 perusahaan yang terdaftar di Bursa Efek
Ghana dalam periode 2008 hingga 2017. Dengan menerapkan metode efek tetap dan
acak, tes Hausman dilakukan untuk memilih metode yang sesuai, hasilnya berdasarkan
fixed and random effect method menyatakan bahwa perusahaan kinerja positif terkait
dengan annual report readability. Selain itu, penelitian ini menemukan bahwa tata
kelola perusahaan memberikan pengaruh negatif pada keterbacaan laporan tahunan.
Akhirnya, penelitian ini mengadopsi F-MOLS untuk menguji Robustness yang
mengkonfirmasi hasil utama. Hasil ini menyiratkan bahwa ada faktor penentu lain dan
faktor-faktor yang mempengaruhi annual report readability daripada perusahaan atau
manajer memanipulasi laporan keuangan untuk memenangkan sentimen investor.

1. INTRODUCTION prepared in line with the disclosure requirement of

The medium by which Public firms the Securities and Exchange Commission (SEC) in
communicate their financial position to stakeholders U.S. Analysts and Shareholders scrutinize the report
is via the annual report. The annual report contains of the firm’s end of year financial details, focusing
the Chairman’s address, the director’s report, vivid basically on the previous year’s developments and
discussion of the company’s operations, related incoming projects (Ho & Wong, 2004). Therefore,
notes, and audited financial statement (Risa transparency in the annual reports is very crucial for
Wahyuni, Febrianto, & Rahman, 2018). The investors and the capital market as a whole, noticing
document expresses the previous performance of the adverse opacity effects of financial information
the firm, future possibilities phrased in simple on interested parties.
language for the understanding of interested parties Recent studies have raised concerns about the
(Gyasi & Owusu-Ansah, 2018). difficulty in the readability of annual reports over
The detailed information in the annual report is the years (Dyer, Lang, & Stice-Lawrence, 2016;

* Corresponding author, email address: redgena3@gmail.com

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 Shuibin Gu, et al: The Impact of Firm Performance on Annual Report Readability …

Ginesti, Drago, Macchioni, & Sannino, 2018). In 2. THEORETICAL FRAMEWORK AND HY-
agreement to this concern, a growing body of POTHESES
literature states that annual report readability is Readability refers to the level at which a complex
necessary to prevent the imbalanced flow of article can be read (Yan & Sun, 2002). A readable
information and enhance stakeholders’ view of the annual report indicates how well the firm transmits
firm (Bayerlein & Davidson, 2011; Courtis, 2004). information to its stakeholders. The main objective
Previous research forgets the possible role of of the study is to examine the impact of firm
firm's performance on the readability of annual performance on annual report readability of firms
reports but centers mainly on firm-level business listed on the Ghana Stock Exchange. It can be said
strategies Habib and Hasan (2018), and the and hypothesized that firm performance has a
implications of capital market pricing of firm negative impact and relationship on annual report
disclosure opacity (Dempsey, Harrison, readability.
Luchtenberg, & Seiler, 2012). This is remarkable, as Several writers have carried out research on the
managers oversee the preparation of the annual relationship between firm performance and annual
report, scholars have the intuition that directors can report readability. Nonetheless, findings from these
alter the firm performance to influence the level of studies may vary, given the readability and firm
readability (Hooghiemstra, Kuang, & Qin, 2017; Kim performance measurement applied in these studies.
& Starks, 2016). In a financial reporting context, previous studies
Studies from Biddle, Hilary, & Verdi, 2009; Risa imply that annual report readability is likely to vary
Wahyuni et al., (2018) employed different methods with firm performance (Hasan, 2018; Li, 2010). The
in their studies and recorded that firm performance performance of the firm influences managers to
is positively related to annual report readability. publish a readable or complex annual report
Their studies centers on the impact of firm (Aymen, Sourour, & Badreddine, 2018; Lo, Ramos,
performance, investment efficiency on annual report & Rogo, 2017). Schrand and Walther (2000) back this
readability, respectively. Contrary to this, Habib & statement up by stating that, managers have the
Hasan, 2018; Li, (2008) focused on the effect of incentive to report good or bad news of the firm in a
earnings, business strategy on annual report more profitable way relative to the practice of
readability individually. Their results revealed a comparing the company’s performance to other
negative relationship with annual report readability. companies. The annual report readability of the
In the Ghanaian context, there is limited firms reflects the performance of the firm. In other to
literature relating to textual analysis. Documenting impress investors, managers write readable reports
the few, Gyasi and Owusu-Ansah (2018) examined to show good performance.
the readability of annual reports within the period Previous literature has discovered that higher
2011 to 2015 of the Social Security and National readability scores are associated with poor
Insurance Trust (SSNIT). The study demonstrated performing firms, and lower readability scores are
the readability trend in Ghana. The results were that related to good firm performance. Employing
SSNIT’s annual report is difficult to read. The lack of annual reports from 60 U.S companies,
literature has necessitated this investigation. The Subramanian, Insley, and Blackwell (1993) finds that
study primarily addresses the issue of the role firm the annual reports of firms that perform better were
performance plays in annual report readability. not difficult to read other than annual reports of
The main contribution of this study is, it adds to firms that perform poorly. Li (2008) is the first to use
the previous literature on firm performance and a large sample data from the U.S capital market to
annual report readability adopting the diverse investigate on the notion that managers can make
perspective of analysis, particularly in the case of annual report readability difficult for investors to
Ghana. In addition, the study considered the role of comprehend and to deduce the forthcoming
corporate governance in analyzing the impact of implications of cash flow in a multivariate
corporate governance on annual report readability. regression analysis. The study finds that higher
The paper follows in such a way that section annual report readability (FOG Index) for firms
two reviews the literature, section three talks about shows lower earnings persistence and profitability
the methodology; section four examines the results in the coming year.
and analysis, whereas section five concludes the
paper including policy implications and
recommendations.

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 Journal of Economics, Business, and Accountancy Ventura Vol. 22, No. 3, Desember 2019 – Maret 2020, pages 444 – 454

Similarly, results from Asay, Libby, and the annual reports of 182 Canadian listed firms in the
Rennekamp (2018) show that managers of firms that year 2013. Using multivariate regression analysis,
perform well, report readable annual report. The the result is that, companies with high CSR scores
study records that, for poorly performing firms, generate higher FOG scores.
managers make an annual report in a favorable way, A growing body of literature indicates the
which focuses on future possibilities, the use of the influence of corporate governance on the readability
causality, passive sentences and fewer pronouns. of the annual report. Whiles some study records a
These results are evidently in line with the intuition strong influence on corporate governance; others do
that managers intentionally choose the linguistic not support this result. Ginesti, Sannino, and Drago
characteristics of their annual report to impact (2017) applied the ordinary least squares (OLS)
investor decisions. Additionally, Habib and Hasan regressions model on a sample of 83 Italian listed
(2018) investigated the relationship between firm- companies of the English-written MD&A over the
level business strategies and annual report period 2008-2012. The result of the study states that
readability using the ordinary least squares (OLS) corporate governance (CEO duality) relates
regressions and firmly fixed-effect model. From the negatively to the Annual report readability (Flesch
results, firms with prospector-type business reading ease), revealing that, the presence of CEO
strategies make a complex annual report, whereas duality reduces board monitoring and increases
those with defender-type business strategies publish complexity in annual report readability. In Ginesti et
readable annual reports. al. (2018), a number of corporate governance
Dempsey et al. (2012) demonstrated the same variables were included in the study, and the results
results by examining the implications of capital revealed a negative association between board size
market pricing on the annual report readability as (B_SIZE) and annual report readability. It shows
measured by the linguistic readability of real estate that increasing the number of board member
investment trusts (REIT) annual reports. After participation improves the level of annual report
employing the ordinary least squares (OLS) readability of the firm. Cerbioni and Parbonetti
regressions model, the result states that financial (2007) support these findings by recording that
opacity had a negative relationship with firm corporate governance (CEO duality) is associated
performance. Also in the case of Enron, an with complex annual report readability. Luo, Li, and
investigation carried out showed that, during the Chen (2018) also utilized the ordinary least squares
final year before subsiding and the firm’s (OLS) regressions model and found a negative
performance started diminishing, reports by relationship between annual report readability and
directors began to be filled with obscure words and agency cost is more prominent in firms with strong
sentences (Gonsalves, 2003). corporate governance systems.
On the contrary, other studies revealed a Aymen et al. (2018) contradict these results by
positive relationship between firm performance and finding a positive association between Analyst
annual report readability. Courtis (1995), using (Corporate governance) and Annual report
relatively smaller sample size, found a positive readability (Flesch Reading Ease index) by
influence between the highest profitable firms and employing the fixed and random effect model on a
annual report readability. Accordingly, Risa sample of 163 companies. Luo et al. (2018) contribute
Wahyuni et al. (2018) analyzed their data using the that, the execution of new accounting standards in
multiple linear regression analysis and empirically 2007 is the reason for the positive relationship
finds a positive association between firm between private firms and annual report readability.
performance (ROA) and annual report readability of Consistent with these findings, Ben‐Amar and
listed firms in the Indonesian Stock Exchange Belgacem (2018) applied OLS regression of annual
between 2013-2017 with a sample of 1222 firm-years. report readability measures (FOG and Length) on
Biddle et al. (2009) also find a positive association corporate social performance and control variables.
between annual report readability and the The study recorded a positive connection between a
investment efficiency of the firm, indicating corporate social performance that determines the
that firms with readable annual report encounter level of corporate environmental, social and
less issue of overinvestment and underinvestment. governance (ESG) performance and difficulty in
In addition to these studies, Ben‐Amar and annual report readability.
Belgacem (2018) investigate the relationship
between social performance and difficulty in annual
report readability specifically the MD&A section of

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 Shuibin Gu, et al: The Impact of Firm Performance on Annual Report Readability …

3. RESEARCH METHOD Concisely, a higher readability score indicates a

Data complex text.
There are 42 firms currently listed on the Ghana
Stock Exchange (GSE) which consists of both The study further uses two independent
financial and non-financial firms. The study’s variables. They are firm performance (FP) and
sample was selected based on the following criteria: corporate governance (CG). The primary
1. Consistency: The selected firms were independent variable of focus is firm performance
continuously listed on the Ghana Stock measured by Return on Assets (Dempsey et al., 2012;
Exchange (GSE) during the period of study. Risa Wahyuni et al., 2018). Return of Assets (ROA)
2. Availability of annual reports: The firms have is a profitability ratio that measures the ability of a
their audited annual reports regularly firm to put all its assets to use to produce income for
published on the Ghana Stock Exchange (GSE) a period of time (Weygandt, Kimmel, Kieso, & Elias,
during the study’s time frame. 2010), where Net income denotes income before
3. Duration: The selected sample/firms meet the extraordinary items. The study calculates Return on
study time span in terms of the firm’s existence. Assets (ROA) as;
Based on the above criteria, the study settled on
15 firms, and that makes the sample of the ROA=
𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
(2)
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
investigation. Reports of listed firms that were not
assessable on the Ghana Stock Exchange (GSE) were
Prior studies have used many corporate
directly retrieved from the company’s website.
governance characteristics as a measure for
The dependent variable for the study is the annual
corporate governance. This study adopts the
report readability. The readability measure for the
measurement of ÈšarÈ (2015) to extract the corporate
study is FOG Index popularly used by many authors
governance index. The mathematical function used
in readability studies (Ajina, Laouiti, & Msolli, 2016;
to construct the corporate governance index is,
Ginesti et al., 2017; Kumar, 2014; Lang & Stice-
Lawrence, 2015). The FOG came about by Gunning
F(x) = (∑𝑛𝑛𝑖𝑖 = 1 Ci × pi) × 10 (3)
(1952) to assist staff in the corporate environment to
improve upon their communication by means of
where:
writing. Lehavy, Li, and Merkley (2011) stated that
i = (1, 2...n);
the FOG index has a straightforward computation,
x = the firm for which index is calculated, n = 6,
usable in any narrative disclosure. The formula for
for this case, because the criterion is 5.
Fog Index is below:
Ci = rating of each criterion i based on the
𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 verification of the degree of fulfilment of the
FOG = 0.4 × + % (complex words) (1) principles of corporate governance.
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
Ci = 0 is taken if the criterion does not exist and 1
Where complex words refer to any word with three if the criterion is completely fulfilled. Values
or more syllables. between 0 and 1 are awarded based on the
extent to which the variables included in the
The FOG Index calculates both the average criterion comply with corporate governance
sentence length, by comparing the number of words principles.
to a number of sentences and the average number of p = the level of importance attached to each criteria
difficult words with a comparison of a number of Ci
words to a number of complex words. A readability
score over 18 is complex; below 18-14 means the text The index computation is based on the
cannot be read, below 14-12 means the text is simple, following criteria as pertains to the corporate
below 12-10 is acceptable and from 10 down to 8 governance variables available in the annual report
means the text is simple to read. of the firms.

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Journal of Economics, Business, and Accountancy Ventura Vol. 22, No. 3, Desember 2019 – Maret 2020, pages 444 – 454

Table 1
Criteria that compose the corporate governance index
Degree of importance
No. Criteria C
(in percentage)
In its annual report, the company includes a separate section
with the corporate governance statement, that contains:
- a statement that it has voluntarily decided to comply with
C1 20%
this Code, or
- an explanation of which particular practices it departs from
and the reasons
The company publicly disseminates all the main aspects of its
C2 20%
corporate governance system
Transparency of information on risk management and internal
C3 20%
control
C4 Dissemination of board remuneration by the firm 20%
Publicly making specific reference to the diversity
C5 10%
the policy applied by the company in relation to:
Board composition and the percentage of
C6 each gender in the composition of the board and 10%
senior executive team

Table 2
Criteria that compose C2 section for the index concerning main aspects
of the company’s corporate governance system.
Degree of importance
No. Criteria C
(in percentage)
2.1 A short description of how the board operates, including:
2.1.1 The frequency of board meetings and individual board
10%
members individual attendance;
2.1.2 The frequency of board committee meetings held and
2.5%
committee members attendance
2.1.3. A brief account of the composition, terms of reference
2.5%
and main subject examined by each board committee
2.1.4 An brief account of how the performance evaluation of
2.5%
the board and its committees has been handled
2.2 Information on board members, including:
2.2.1 The identification of the chairman, the vice-chairman (if
appointed), chief executive, chairmen and members of 10%
the Board Committees

2.2.2 Independent non-executive board members 2%

2.2.3 short biography of every board member Including

2%
company Secretary

2.2.4 Term of appointment of every board Member 2%

2.2.5 Other professional commitments of every board member 2%

448
 Shuibin Gu, et al: The Impact of Firm Performance on Annual Report Readability …

The study then added the control variable as approach is as an average of ADF statistics. The unit
used by other studies (Ajina et al., 2016; Ginesti et root test has the following equation:
al., 2018; Li, 2008; Rjiba, 2015) firm size (SIZE). SIZE p
is proxies using the natural logarithm of the total Yit = ρiyi,t−1 +∑j=1 φij∆yi,t−j +Z1it+ εit (5)
assets of the firm. This was used by Luo et al. (2018) The null hypothesis indicates that all series
by investigating the association between annual within the panel have unit root H0: qi = 1 and
report and corporate agency costs and Rjiba (2015) alternatively part of the series is stationary: H1: qi <
in examining the effect of annual report readability 1.
on the cost of equity capital in French firms between
2002 and 2006. Firm size as well explains annual Fixed and Random effect method specification
report readability. Larger firms with more complex In this study, the association between firm
operations are expected to have longer and difficult performance and annual report readability is
annual report readability. empirically tested using the fixed-effects and
random-effects model. The assumption underlying
Table 3 the fixed effect model is that, in employing the fixed
Variable and Data Description effects model, the independent variable may be
Variables Unit Source influenced or biased. The fixed-effect model takes
away this effect and tabulates the net effect of the
Annual Report Ghana Stock
Number independent variable on the dependent variable
Readability Exchange
Scale (Baum & Christopher, 2006; Wooldridge, 2002)
(ARR) (GSE)
The equation for a fixed effect model is as
Firm Ghana Stock follows:
Performance Percentage Exchange
Yit = ∑ 𝛽𝛽1X it + αi + uit (6)
(FP) (GSE)
Corporate Ghana Stock Where αi is the unknown intercept for each
Number entity, Yit is the dependent variable, and β is the
Governance Exchange
Scale coefficient for the independent variable uit is the
(CG) (GSE)
error term, i = entity and t = time
Ghana Stock The fixed effect model is then modified to suit
Size
Raw Value Exchange the study in the equation below:
(Size)
(GSE)
Source: Authors Composition ARRit = β1FPit + β2CGit + β3SIZEit + αi + uit (7)

The random effect model assumes that the

Model
individual effects are held by the intercept and a
The main objective of the study is to develop a
random component. The random component is not
regression model for the estimation of the impact of
related to the independent. The fixed effect and
firm performance on the readability of the annual
random effect is selected based on results from the
report. The model developed is as follows:
Hausman test (Hausman, 1978).
The equation for a random effect model is as
ARRit = α + β1FPit + β2CGit + β3SIZEit + εi (4)
follows;
Where ARR is Annual report readability (FP) is Yit = ∑ 𝛽𝛽1X it + α + uit + ε i (8)
Firm performance, (CG) is corporate governance
and (SIZE) is Firms size, α is the intercept, i and t is The random effect model is then modified to
the firm and time respectively suit the study in the equation below:
β1… β3 are the coefficients, and ε is the error
ARRit = β1FPit + β2CGit + β3SIZEit + α + uit + ε it (9)
term. The main explanatory variables (firm
performance, corporate governance) are expected to Hausman Test
have a negative effect on annual report readability. The study then adopted the Hausman test to
determine the suitable method for the study. The
Method Null hypothesis of the Hausman test states that the
Panel unit root test. The Im, Pesaran, and Shin fixed effect is appropriate as against the alternate.
(2003) and Levin, Lin, and Chu (2002) tests are being Thus, the researchers use the random effect model
utilized in this panel study. This unit root test for the study.

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 Journal of Economics, Business, and Accountancy Ventura Vol. 22, No. 3, Desember 2019 – Maret 2020, pages 444 – 454

4. DATA ANALYSIS AND DISCUSSION

Table 4: Descriptive statistics

VARIABLE ARR FP CG SIZE
Mean 11.3374 0.0052 73.7439 7.4907
Median 10.3698 0.0487 71.7500 7.7207
Maximum 20.3000 0.7656 93.3750 8.8799
Minimum 2.2188 -5.6487 69.0000 5.5093
Std. Dev. 5.6244 0.4948 6.0772 0.8303
Skewness 0.0780 -10.4425 2.2660 -0.4013
Kurtosis 1.5595 120.1053 7.7883 2.0678
Source: Computed by authors

The descriptive statistics indicate the Table 5

characteristics of the variables by estimating the Correlation Matrix
mean, median, minimum, including measurements Variable ARR FP CG SIZE
like standard deviation, with the highest and lowest
mean being 93.3750 and -5.6487, respectively. A ARR 1 0.0848 -0.1060 -0.0110
standard deviation of the highest value is 6.0772 and FP 0.0848 1 0.1318 0.1295
a lower value of 0.4948. The variables also recorded
CG -0.1060 0.1318 1 0.4398
a higher value and lower values of skewness at 2.660
and -10.4425, respectively. SIZE -0.0110 0.1295 0.4398 1
Source: Computed by authors

This section reports the empirical results on the relationship between all variables. The data set
demonstrates that the Annual report readability positively relates to Firm performance. In addition, a negative
relationship is seen between corporate governance (CG), Firm size (SIZE) and Annual report readability.

Table 6
Unit Root Results
Variable LLC Level Intercept LLC 1st Difference IPS Level intercept IPS 1st Difference
ARR 94.7682 -16.8651*** 41.2355 -7.5546***
FP -7.6741*** -12.2512*** -3.5138*** -.8047***
CG -3.3173 -1.9539** -3.1081 -6.1179***
SIZE -1.85390** -6.15877*** 2.33752 -.52835***
Notes: *, ** and *** denote significance at 10%, 5% and 1%, respectively. Source: Calculations by authors

Table 6 talks of two methods of unit root test, Table 7

which is Levin, Lin & Chu (LLC) and Im, Pesaran & Regression Results
Shin (IPS). The researcher estimated the variables for Variable Fixed Effects Random Effects
unit roots in level intercept and 1st Difference. At LLC
1.7077 1.1128
level and 1st difference, Unit root test do not hold for FP
(1.0426) (0.9614)
Firm performance (FP) and Firm size (SIZE). By using
-1.7347 -0.1245
the IPS method, however, all variables are stationary CG
(1.1063) (0.0864)
(i.e. no unit root) after the 1st difference.
2.1767* 0.2399
SIZE
(1.1619) (0.6324)
122.9457 18.7130
CONS
(82.8185) (6.1076)

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 Shuibin Gu, et al: The Impact of Firm Performance on Annual Report Readability …

NB: *** Significant at the 1% level, **Significant at the CEO duality breaks board monitoring which intends
5% level, *Significant at the 10% level. Standard increases difficulty annual report readability.
errors are in parentheses Source: Authors Own. Similarly, results from Luo et al. (2018) with the use
of the same method showed that agency costs
Table 7 shows the summaries of the results using increases in firms with better corporate systems.
the fixed and random effect model. Based on the However, other studies disagreed with these results
Hausman test results, the random effect method was with positive findings from their investigations. In
adopted (see Table 7). It can be noticed that Firm contrast to the results above, Aymen et al. (2018) by
performance (FP) measured by Return on Assets employing the fixed and random effect model on a
(ROA) has a positive relationship with Annual report sample of 163 companies, recorded a positive
readability (ARR). This can be explained that a 1% connection between Corporate governance (Analyst)
increase in firm performance (FP) leads to more than and Annual report readability (Flesch Reading Ease
100% increase in the level the plainness of annual index).
reports on the average. This result does not provide Firm size (SIZE) is also reported to have a
enough support for the hypothesis above; thus, firm positive but insignificant association with Annual
performance has a negative impact on annual report Report Readability (ARR) reflecting that bigger and
readability. The study’s result is in line with the smaller firms produce a difficult and easier annual
findings of (Courtis, 1995; Risa Wahyuni et al., 2018). report, respectively. An increase in the SIZE of a
Courtis (1995) utilized a relatively smaller sample size company shows that the readability result of the
and discovered a positive connection between the annual report exceeds the difficult to read annual
highest profitable firms and annual report report readability score. That is FOG ≥ 18, meaning
readability. Also, Risa Wahyuni et al. (2018) the text cannot be read. By the use of ordinary least
employed Ordinary Least Square(OLS) and found a squares (OLS) regressions model, fixed and random
positive relation between firm performance (ROA) effect method, Ginesti et al. (2017); Habib & Hasan
and annual report readability of listed firms in the (2018) confirms this result, respectively. On the other
Indonesian Stock Exchange. Conversely, results from hand, Li (2008); Luo et al. (2018) does not support this
Dempsey et al. (2012) revealed a negative outcome of relationship with negative results on firm size and
capital market pricing on the annual report annual report readability.
readability. After employing the ordinary least
squares (OLS) regressions model, in the same vein, Table 8
Habib and Hasan (2018) focused on the effect of firm- Hausman Test Results
level business strategy on annual report readability Chi-Sq. Chi-Sq.
Test Summary Prob.
and recorded negative results. Statistic d.f
Additionally, in this study, corporate Cross-section
7.79 3 0.05
governance (CG) is seen to be negatively related to random
Annual report readability (ARR) and statistically Source: Authors Own
insignificant. The result indicates that robust
corporate governance systems improve the effect of The study applied the Hausman test to
annual report readability helping interested parties to determine the appropriate method to use. The
access and understand annual report. Ginesti et al. Hausman test gives a Null Hypothesis that the fixed
(2017), after applying the ordinary least squares (OLS) effect model is appropriate against the alternate.
regressions model on a sample of 83 Italian listed Based on the result from the table above the study
companies established that corporate governance rejects the Null Hypothesis at the conventional
(CEO duality) is negatively related to Annual report significance at 5%.
readability (Flesch reading ease). This means that

Table 9
Robustness Check Results
Variable Coefficient Std. Error t-Statistic Prob.
FP 6.9933 50.3240 0.1389 0.8929
CG -17.7960 45.2493 -0.3932 0.7044
SIZE -3.0914 20.3799 -0.1516 0.8832
Source Authors Calculations

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 Journal of Economics, Business, and Accountancy Ventura Vol. 22, No. 3, Desember 2019 – Maret 2020, pages 444 – 454

The study conducted a further robustness test for readability.

the model above employing the Panel Fully Modified
Least Squares (FMOLS) estimation method. From the Implications and recommendations
results, none of the variables is noticed to have a This result implies that there are other determinants
significant impact on annual report readability. The and factors that influence annual report readability
F-MOLS result is consistent with the original outcome rather than firms or managers manipulating
above, with the exception of firm size (SIZE). The financial reports to win investor sentiment. This
results mean that an increase in firm performance issue brings to light that, even though there has been
increases annual report readability of firms, whereas general agreement among standard setters and
an increase in corporate governance (CG) and firm's regulators such as U.S Securities and Exchange
size (SIZE) reduces annual report readability. It Commission (SEC) on understandable disclosure,
appears that, on the one hand, larger firms with the issue on annual report readability still
complex operations increases the difficulty in annual aggravates from different causes. The effects of this
report readability. On the other hand, regulatory on stakeholders must be highlighted. Regulators
systems in the disclosure environment necessarily must take into consideration writing
give rise to more transparent reports. understandable disclosure into laws when
improving corporate information report, to establish
5. CONCLUSION, IMPLICATION, SUGGES- a probable switch between honesty and the
TION, AND LIMITATIONS readability of the annual report.
Using the Fixed and Random effect model, the study It can be recommended that the involvement of
investigates the impact of firm performance on corporate governance in a firm puts the firm in
annual report readability of 15 listed firms in Ghana check. Therefore regulators should also persistently
within the period 2008 – 2017. Some previous stimulate firms to improve upon corporate
findings are not convergent with the study’s governance systems to ensure disclosure quality.
outcome. Results derived from various contexts are Additionally, the study strongly recommends that
different, given the disparity in country settings. further research be done on the causes of the positive
Findings from this study state that the firm's relationship between Firm performance (ROA) and
performance (FP) positively relates to annual report Annual report readability (FOG Index) by utilizing
readability (ARR). This result does not provide different forms of variables measurement and
enough support for the study's hypothesis; thus, methods to check the validity and reliability of
firm performance has a negative impact on annual results.
report readability. The reason is that the business The limitations encountered in the study are
operations of the firm are not focused on the firm’s that the readability measure used in this study is one
assets. Therefore, the firm’s performance does not while others used two for improved results. To add
affect its annual report readability in any way. to it, the FOG index used to measure annual report
Secondly, the result of corporate governance readability identifies complex words. Complex
and annual report readability reveal that corporate words may be subjective depending on the level of
governance (CG) has a negative influence on annual understandability by expert judgments. In a
report readability. The increase in control systems nutshell, the sample size was relatively small.
and regulations of financial documents improves
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