Annual Report Readability and Agency Cost: The Influence of Firm Size

Abstract

This study examines whether the impact of annual report readability on agency cost varies with firm size among listed Indian non-financial firms. For this study, we have selected two cross-sectional samples comprising 360 non-financial firms listed on National Stock Exchange (NSE)—divided into 183 small firms and 177 large firms—for the financial year 2019–2020 and 2020–2021. The classification between large and small firms is drawn based on the respective quartile values of total assets and market capitalization taken together. The proxy for agency cost is the natural logarithm of selling and distribution expenses. We have developed an index using the count of characters, words, lines, and pages of the annual report to measure readability. To investigate the association between the annual report readability, agency cost, and firm size, we use the OLS methodology. In our model, we control for fixed assets, leverage, ownership concentration, institutional ownership, the board size, and board independence. Our findings reflect an inverse relationship between readability and agency cost. Additionally, we find that the effect of annual report readability on agency cost is higher for large firms than for smaller firms. We further checked our findings’ robustness using a logistic regression model and found similar results.