Workforce diversity and financial statement readability

Abstract

AbstractThe Securities and Exchange Commission has associated readability with a range of linguistic features largely determined by the language style of the information producers, including sentence length and the use of personal pronouns, familiar words, surplus words and active voice. We examine the impact of a firm's workforce ethnic diversity on its financial statement readability. Based on linguistic literature, we argue that a more diverse workforce increases the linguistic heterogeneity of the inputs into financial statements, hindering financial statement readability. We show that financial statement readability decreases with the ethnic diversity of the workforce, and that this effect is more pronounced for firms located in a community with a high crime rate or low social capital. We also find that the market reacts less to the earnings surprises of firms with less readable financial statements. We further find that the impact of white‐collar employee diversity on readability is greater than that of blue‐collar employee diversity. The results of robustness tests suggest that workplace diversity does not reduce firms' overall information production quality, which rules out the alternative explanation that employee diversity hinders financial statement readability through increasing employee conflict and communication errors. Overall, our study suggests that workforce diversity is an important determinant of financial statement readability.