Corporate culture's influence on the transparency of financial reporting in Iran: an in-depth analysis of readability and tone

Abstract

Purpose

This study investigates the influence of corporate culture on financial reporting transparency within Iranian firms.

Design/methodology/approach

Leveraging a dataset of 1,480 firm-year observations from the Tehran Stock Exchange spanning from 2013 to 2022, the study employs text mining to quantify linguistic features of corporate culture and transparency, specifically readability and tone, within annual financial statements and Management Discussion and Analysis (MD&A) reports.

Findings

Our results confirm a positive and significant relationship between corporate culture and financial reporting transparency. The distinct dimensions of corporate culture — Creativity, Competition, Control, and Collaboration — each uniquely enhance financial transparency. Robustness tests including firm fixed-effects, entropy balancing, Generalized Method of Moments (GMM), and Propensity Score Matching (PSM) validate the profound influence of corporate culture on transparency. Additionally, our analysis shows that corporate culture significantly affects the disclosure of business, operational, and financial risks, with varying impacts across risk categories. Cross-sectional analysis further reveals how the impact of corporate culture on transparency varies significantly across different industries and firm sizes.

Research limitations/implications

The study’s scope, while focused on Iran, opens avenues for comparative research in different cultural and regulatory environments. Its reliance on text mining could be complemented by qualitative methods to capture more nuanced linguistic subtleties.

Practical implications

Findings underscore the strategic importance of cultivating a transparent corporate culture for enhancing financial reporting practices and stakeholder trust, particularly in emerging economies with similar dynamics to Iran.

Originality/value

This research is pioneering in its quantitative analysis of the textual features of corporate culture and its impact on transparency within Iranian corporate reports, integrating foundational theoretical perspectives with empirical evidence.