CAN EARNINGS MANAGEMENT BE REVEALED THROUGH ANNUAL REPORT READABILITY? EVIDENCE FROM TÜRKİYE

Abstract

Readability is a measure of how comprehensible a text is to the average reader. Given a significant portion of corporate disclosures consists of text, readability level of these disclosures make them important particularly for investors. On the other hand, the use of readability as a strategic communication tool by management has become an interesting topic in the last decade. This study investigates whether earnings management affects annual report readability in the Turkish capital market. The sample includes 2012-2021 periods of 54 firms listed on the Borsa Istanbul. Annual report readability is measured using the Fog (1952) Index. As a proxy for earnings management, discretionary accruals are estimated by using the modified Jones (1995) model. Results of panel regression analysis show that annual reports are less readable for firms that manage their earnings. Thus, it is concluded that annual report readability could be considered as an indicator for detecting earnings management.