Culture and annual report readability

Abstract

Purpose This study aims to examine the effect of state culture on the readability of narrative disclosures in annual reports based on firms located in all 50 states of the USA. Design/methodology/approach The author uses the cultural tightness and looseness (Harrington and Gelfand 2014) index at the state level and the BOG index (Bonsall and Miller, 2017) as the primary measures of annual report readability. Findings Using US data from 1994 to 2019, this study finds that the state level of cultural tightness in which firms are located positively affects firms’ annual report readability. In addition, the study finds that the positive effect of cultural tightness on annual report readability is pronounced in subgroups with high litigation risk while the result does not hold with subgroups that have low litigation risk. The results are robust when alternative proxies for annual report readability are used and historical location and the states in which firms are incorporated are considered. Originality/value This study contributes to the growing literature on the determinants of readability in annual report because firms’ narrative disclosure in annual report varies depending on the information environment, litigation risk, embedded in each state culture where firms are located.