Guiding through the Fog: Does annual report readability reveal earnings management?

This paper attempts to find a relationship between earnings management and annual report readability. The study was conducted on the French stock market between 2010 and 2013 and includes 163 firms listed on the CACALL shares index. We assess the readability of annual reports using the Gunning-Fog Index and earnings management is measured by discretionary accruals estimated using the models of Dechow et al. (1995) and Raman and Shahrur (2008). Our results show the existence of a positive and significant relation between the level of discretionary accounting adjustments and Fog Index. In fact, companies managing their earnings tend to make annual report readability more complex. In this way, we also find a significant link between the Fog Index and the other financial indicators of our model (Ownership dispersion, Profitability, Leverage and Firm size), so supporting our main result.