Earnings Management and Annual Report Readability
We explore how the readability of annual reports varies with earnings management. Using the Fog Index to measure readability (Li 2008), and focusing on the management discussion and analysis section of the annual report (MD&A), we predict and find that firms that are most likely to have managed earnings to beat the prior year’s earnings have MD&As that are more difficult to read. In addition, we find that readability has marginal but incremental power in predicting financial misstatements when added to the F-Score model of Dechow et al. (2011).
Kin Lo, PhD, FCA is an Associate Professor at the Sauder School of Business, UBC. He holds the CA Professorship in Accounting established by the Institute of Chartered Accountants of British Columbia. He articled at PricewaterhouseCoopers and subsequently earned his doctorate from the Kellogg School of Management at Northwestern University in Chicago. His research covers a range of topics,including financial analysts, insider trading, earnings management, and equity valuation. His work has been published in top journals such as Journal of Accounting & Economics and Journal of Accounting Research. He has served as Associate Editor for the Journal of Accounting & Economics, and is currently on the editorial board of Contemporary Accounting Research.
Professor Lo has taught extensively intermediate level financial accounting for undergraduates, and has authored a two-volume text book for these courses. He also contributes to student development extra-curricularly by coaching teams for case competitions. He was awarded Fellowship in the BC Institute of Chartered Accountants (FCA) in 2013 for his many contributions to research and student learning.