BUSINESS STRATEGY, EARNINGS MANAGEMENT, AND READABILITY OF NARRATIVE INFORMATION OF THE ANNUAL REPORT (EMPIRICAL STUDY ON INDONESIA LISTED COMPANIES)

Abstract

This study aims to examine the association of business strategy and earnings management on the readability of narrative information in the annual report. The readability of narrative information on an annual report is measured by the Fog Index. The business strategy in this study is measured by a rolling average of five years of research and development ratios, ratio of number of employees, employee fluctuations, capital intensity and changes in income. Earnings management in this study uses accrual earnings management. This research was conducted at publicly listed companies in Indonesia in the 2015 to 2017. The total sample of the study was 495 firm-years. The results of this study prove that the company's business strategy has an association with the readability of financial statement narrative information. However, there is no evidence that the level of legibility of the annual report's narrative information is related to earnings management by the company. In summary, it can be concluded that the level of readability of narrative information on a company's annual report in Indonesia tends to be driven because of the company's business characteristics, not because of the opportunistic motives of management.