This paper explores the factors that shape the complexity of company annual reports in the USA. Using a general-to-specific modeling approach, this study examines the determinants of annual reports' tone complexity.
Negative relationships were found between agency problems and tone; agency costs and readability of annual reports; profitability and tone; and ownership structure and tone complexity.
These relationships helped to confirm several of this study’s hypotheses, whereas positive associations were found between investment growth opportunities and tone complexity, which contradicts one of our initial hypotheses. Findings reveal that the more complex the language in an annual report is, the more difficult it is to strategically make a judgment or decision about the reported financial situation.
Analyzing these variables allows security analysts and investors to obtain important information, not available in the financial statements, which would enhance their understanding of the firm and improve their recommendations and investment decision-making process.
