Readability, governance and performance: a test of the obfuscation hypothesis in Qatari listed firms

Abstract

PurposeThis paper aims to examine the relationship between the readability of annual reports and corporate performance in Qatari listed firms while controlling for a firm’s competitive position, governance structure and specific features such as size, age and industry type.Design/methodology/approachThis study relies on both agency theory and legitimacy theory to develop testable hypotheses. It uses a sample of 126 firm-year listed companies in the Qatar Stock Exchange to test obfuscation in the annual reports through examining the association between the readability of Narrative Disclosures (NDs) and corporate profitability, financial risk and agency costs for the period from 2014-2016.FindingsThe findings show that firms with higher annual report readability are more profitable and have lower agency costs, which is an indication of the existence of “obfuscation.” Qatari firms may use narrative complexity as a disclosure strategy to enhance their image and consequently maintain their social legitimacy.Research limitations/implicationsAlthough the study findings suffer from limited global generalization, they can be generalized across Gulf Cooperation Council countries. Thus, future cross-country research is encouraged.Practical implicationsThe findings encourage Qatari policymakers to instate a policy for “Plain English” writing to make NDs easy to read by international investors.Originality/valueThis study is one of very few studies that examines the readability of annual reports in emerging market economies, i.e. Qatar. The study contributes to the paucity of research that examines English-written annual reports in non-English speaking countries.