Annual Report Readability And Corporate Earnings Management

With the readability of annual reports getting worse,the usefulness of them is contrasting with their importance.The "accountancy uselessness theory","accounting demise theory" and "accounting art theory" have begun to stir up.If the readability of annual reports can restrain the company’s earnings management behavior and significantly improve the supervision of accounting and its role of decision-making support,then "accountancy uselessness theory" will break through.Based on this,we have launched some related empirical tests.To give an insight into these issues,we use 19,186 firm-year observations of Chinese A-share listed firms from 2001-2015 to investigate the relationship between annual report readability and corporate earnings management,results are as follows:(1)The readability of the annual reports has a significant inhibitory effect on the corporate positive and negative accrual earnings management." which means that the readability of the annual reports is conducive to improving the internal governance mechanism of the company and constraining management behavior;(2)The external audit quality will weaken the inhibitory effect,while the quality of internal control and management shareholding behavior will strengthen the relationship.The results have passed different kinds of robustness tests.In addition,this paper also finds that there is a positive correlation between annual report readability and real earnings management,which means that when the corporate annual report information is more transparent and external supervision is stronger,managers will turn to more concealed and more flexible real earnings management activities.The study makes sense academically and practically.Theoretically speaking,this article enriches the relevant research on the economic consequences of the readability of annual reports,which makes up for the gaps in related literature.It is also an influential factor on principal-agent theory,accounting application theory,and earnings management.In practice,this paper verifies the effect of annual report readability on the suppression of earnings management,which provides policy makers with the idea of future reforms for annual report disclosure.