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93 Seiten, Note: 1
List of Figures
List of Tables
1.1 Aim of this Work
2. Reporting on Financial Markets
2.2 Purpose and Functions of Reports
2.3 Typical Content of Reports
2.3.1 Letter to the Shareholders
2.4 Specifics of Reports at Frankfurt Stock Exchange Prime Market
2.4.1 The Frankfurt Stock Exchange
2.4.2 Annual Reports at Frankfurt Stock Exchange Prime Market
2.4.3 Quarterly Reports at Frankfurt Stock Exchange Prime Market
2.5 Market Functioning
2.5.2 Efficient Markets Hypothesis
2.5.3 Incomplete Revelation Hypothesis
3. Stakeholder Theory
3.1 Historical Origins
3.2 Stakeholder Definition
3.3 Stakeholder Groups
3.4 Stakeholder Concept
3.5 Relationship Between Shareholders and Managers
3.5.1 Agency Theory
3.5.2 Obfuscation Hypothesis
3.5.3 Shareholder Influence and Independence
4. Readability Research
4.1 Concept of Readability
4.2 Measures of Readability
4.2.2 Historical Overview of Readability Research
4.2.3 Gray and Leary’s Readability Study (1935)
4.2.4 Dale-Chall Formula (1948)
4.2.5 Gunning-Fog Index (1952)
4.2.6 Flesch Index (1948)
4.3 Limitations of Readability Measures
4.3.2 Bruce’s Categorization
4.3.3 Other Critics
184.108.40.206 Usability Testing
220.127.116.11 Cloze Procedure
4.4 Readability of Corporate Reports
4.4.2 Annual Report Readability
18.104.22.168 Pashalian and Crissy (1950)
22.214.171.124 Soper and Dolphin (1964)
126.96.36.199 Barnett and Leoffler (1979)
188.8.131.52 Still (1982)
4.4.3 Studies on Performance Influence on Readability
184.108.40.206 Adelberg (1979)
220.127.116.11 Courtis (1986)
18.104.22.168 Jones (1988)
22.214.171.124 Baker and Kare (1992)
126.96.36.199 Smith and Taffler (1992)
188.8.131.52 Subramanian, Isley and Blackwell (1993)
184.108.40.206 Courtis (1995)
220.127.116.11 Rutherford (2003)
18.104.22.168 Smith, Jamil, Johari and Ahmad (2006)
22.214.171.124 Li (2008)
126.96.36.199 Hossain/Siddiquee (2008)
5. Research Design
5.1 Hypothesis Development
5.1.2 Hypothesis 1 – Level of Difficulty
5.1.3 Hypothesis 2 – Bilingual Reports
5.1.4 Hypothesis 3 – Company Size
5.1.5 Hypothesis 4 – Shareholder Independence
5.1.6 Hypothesis 5 – Share Price Volatility
5.1.7 Hypothesis 6 – Financial Performance
5.2.1 Research Objects
5.2.3 Statistical Methods
6.1 Descriptive Statistics
6.1.2 Main Variables
6.1.3 Readability Scores
188.8.131.52 Adjusted Flesch Score in German
184.108.40.206 Adjusted Flesch Score in English
220.127.116.11 Raw Flesch Score in German
18.104.22.168 Raw Flesch Score in English
6.2 Hypothesis Testing
6.2.2 Testing Hypothesis 1 – Level of Difficulty
22.214.171.124 Testing Hypothesis 1.1
126.96.36.199 Testing Hypothesis 1.2
6.2.3 Testing Hypothesis 2 – Bilingual Reports
6.2.4 Testing Hypothesis 3 – Company Size
6.2.5 Testing Hypothesis 4 – Shareholder Independence
6.2.6 Testing Hypothesis 5 – Share Price Volatility
6.2.7 Testing Hypothesis 6 – Financial Performance
188.8.131.52 Testing Hypothesis 6.1
184.108.40.206 Testing Hypothesis 6.2
6.2.8 Summary Table of Hypotheses Testing
References and Sources
Figure 1: Typical components of annual/quarterly reports
Figure 2: Typical content of a letter to the shareholders
Figure 3: Typical stakeholders of a company
Figure 4: Factors that influence reading difficulty
Figure 5: Exemplary excerpt of words contained in Dale's list
Figure 6: Readability-score.com analysis form
Figure 7: Superfluous dots in a letter to the shareholders
Figure 8: Distribution adjusted Flesch score in German
Figure 9: Distribution adjusted Flesch score in English
Figure 10: Distribution raw Flesch score in German
Figure 11: Distribution raw Flesch score in English
Figure 12: Readability correlation in bilingual quarterly reports
Table 1: BvDEP Independence Indicator classification
Table 2: List of style factors affecting readability by Gray and Leary
Table 3: Dale-Chall formula correction table
Table 4: Interpretation of the Fog index
Table 5: Flesch' reading ease scale
Table 6: Key questions unanswered by readability formulas
Table 7: Research studies on the relationship between performance and readability of corporate annual reports
Table 8: Descriptive statistics of the sample
Table 9: Summary statistics adjusted Flesch score in German
Table 10: Summary statistics adjusted Flesch score in English
Table 11: Summary statistics raw Flesch score in German
Table 12: Summary statistics raw Flesch score in English
Table 13: Readability by industries
Table 14: Test on industry difference with confidence intervals
Table 15: Regression analysis adjusted Flesch score German
Table 16: Regression analysis adjusted Flesch score English
Table 17: Regression analysis raw Flesch score German
Table 18: Regression analysis raw Flesch score English
Table 19: Summary of hypotheses testing
Financial reports can be regarded as the primary means of communication between a company’s management and its shareholders. The reports also address all other kinds of stakeholders like employees, suppliers, customers, competitors, governments, potential investors, bond holders and, in a broad sense, the entire society. Generally speaking, financial reports concern “any group or individual who can affect or is affected by the achievement of the organization’s objectives.”
The reports aim to keep stakeholders informed about the business history, financial status and future expectations. Typically, both narrative information and quantitative data are provided in firms’ reports through the inclusion of financial statements, notes, discussion of operations and letters to the shareholders. Investors to a great extent base their risk assessment and investment decision on these published reports. Therefore, they rely on the usefulness, accuracy and understandability of the “intelligence” provided.Bloomfield cites a vivid example in which he compares financial reporting with the provision of raw data – it still depends on the investor himself to extract meaningful statistics out of the data and draw reasonable conclusions. This of course takes time and effort and is by no means a trivial task. Hence, the process is said to be costly. Still, the traditional Efficient Markets Hypothesis (EMH) leads to the conclusion that no matter how obscurely financial reports are presented or how costly their interpretation is, market prices fully reflect all available information. In contrast to the EMH, the Incomplete Revelation Hypothesis (IRH) states that investment decisions indeed depend on the extent of costs required to extract statistics from public data. It is argued that additional costs decrease trading interest. Low trading interest then leads to a lower revelation in market prices. Moreover, and in line with the IRH, Bloomfield states that by various means managers could actively hamper investors to uncover information that should not be uncovered to keep stock prices high. The IRH therefore implies that market reactions to negative business results can be reduced by providing information that is costly to analyze and interpret.
One possible way of obscuring corporate information when results are negative, or of being forthcoming in disclosing information when results are good, is to adjust the reports’ readability which can influence understandability as a consequence. There is a broad set of readability formulas that allow defining a level of text difficulty based on linguistic factors like sentence length as well as word length and characteristics. Careful application of these formulas allows providing an estimation of the probable success a target group will have in reading and understanding a certain text. Various studies with different variables and samples have already shown that there are tendencies that weak financial performance induces poor readability of a report. Still, it is doubtful whether reports are written to be difficult on purpose or it is just more demanding to explain why losses have occurred. Moreover, numerous studies clearly disprove any significant relationship between performance and readability. Additionally, the influence of a company’s shareholder structure and the resulting dependence or independence of the management board on its financial report’s readability is a topic that has not been examined adequately.
Most of the research conducted in the field of readability focuses on reports in English either as first or second language. Little attention has been paid to German reports. Besides of that it has always been the annual report being used as sample basis. Nonetheless, reports that are published throughout a business year, quarterly reports, should not be underestimated.
Therefore, the concrete aim of this thesis is to focus on the readability of letters to the shareholders of bilingual (German and English) quarterly reports of listed companies at Frankfurt Stock Exchange.
The underlying research question of this work shall be formulated as follows:
“What influences readability of letters to the shareholders of quarterly reports of publicly listed companies on the Frankfurt Stock Exchange?”
This thesis contributes to existing literature in various ways. On the one hand, it is among the very few works that consider the influence of performance on the readability of German reports and, in addition, sets the focus on quarterly reports. On the other hand, it takes into account the dependence or independence of managers of their shareholders measured by the company’s shareholder structure, industry, share price volatility and the size of firms. Moreover, it is examined whether there is a tendency that reports in different languages tend to have the same relative level of difficulty. In general, the thesis also examines and questions research methods of prior studies in the field of report readability.
Chapter 2 gives the reader background on reporting habits and typical elements of content. The current legal and practical reporting situation at Frankfurt Stock Exchange is then discussed to become aware of what can actually be expected from published reports. Moreover, the Efficient Markets Hypothesis in contrast to the Incomplete Revelation Hypothesis is discussed to provide a theoretical basis why managers could offer (in)complete information in reports.
In Chapter 3 the stakeholder theory is reviewed to gain understanding to whom company reports are addressed. Moreover, the status of shareholders is examined drawing on principal-agent theory and focusing on the question of how dependent or independent managers are from shareholders. The concept of obfuscation in reports is also discussed.
Chapter 4 explores the theoretical foundations of the empirical study and deeply reviews and compares existing literature and studies conducted in the field of readability. A special focus is set on prior research on readability of (annual) reports.
Then, in Chapter 5, the hypotheses are formulated and the research design for the empirical part is discussed. This also includes the presentation of the sample and the utilized variables. Moreover, the relevant statistical research methods are described.
Finally, in Chapter 6, various statistical analyses are conducted. The empirical results are then described, interpreted and compared with previous research. Besides, potential further fields of research are discussed. Moreover, the limitations of sample and methodology are discussed and evaluated.
In Chapter 7, a final conclusion is provided.
Business participants, investors and all other types of stakeholders are familiar with the concept of annual reports. It is essentially “a financial and narrative report” of the firms’ business activities during the previous year. The motivation to publish those reports is not solely based on a legal obligation since they also offer a suitable means for stakeholder communication. Moreover, depending on local legislation, many listed companies are required to issue quarterly reports. These reports are often unaudited, less extensive and have very different levels of comprehensiveness. They are mainly designed to update existing, not prospective, shareholders.
The following chapters elaborate on the functions, content and importance of both annual and quarterly reports. For reasons of simplicity and consistency with already existing literature, the term reports is used instead of annual and quarterly reports throughout this work with the exception of those sections where one type is meant specifically.
Courtis provides a comprehensible definition of what (annual) reports are:
“[…] a formal communication document comprising quantitative information, narratives, photographs and graphs. It seeks to inform shareholders, creditors and others […]. It is essentially a response to mandatory disclosure requirements […]. It is also a medium for voluntary disclosures perceived to produce net corporate benefits.”
One can conclude from this quote that reports cannot be reduced to their sole existence due to legal obligations, but should be seen as a means of communication with stakeholders that allows assessing the risk-return ratio of an asset prior to an investment decision.
Abstractly spoken, reports can be described as a “costly process of information gathering and processing”. Broken down, reports merely serve the following functions:
- Self information
- Information of shareholders, creditors and other stakeholders
- Limited due to various measurement and assessment regulations
- Limited due to obfuscation
- Protection of creditors
- Business risk of unsuccessful operation
- Risk of being ranked second after shareholders in terms of payments
- Based on separation of ownership and control
- Documentation and evidence
- Determination of income
- Based on balance sheet and income statement
- Can be basis for tax calculation
- Highly dependent on legal codes
- Assessment of payments (e.g. dividends)
- Influenced by determined income and dividend policy
- Regulated by capital maintenance rules
Jurisdiction usually requires companies to publish reports that contain at least a balance sheet and an income statement. Moreover, depending on specific law, a broad range of extensions and explanations is required.
The factors influencing the concrete arrangement and content of reports are various. Typically, legal obligations, country, industry, firm size, habits and other factors are seen to play a crucial role. A rough separation of content into business reporting and financial reporting can be found in most reports.
 Baker/Kare (1992), p.1.
 Freeman (1984), p.46.
 Courtis (1995), p.4.
 Subramanian et al. (1993), p.49.
 Courtis (1995), p.4.
 Bloomfield (2002), pp.233.
 Bloomfield (2002), p.238.
 Bloomfield (2008), p.249.
 Li (2008), p.221.
 Tekfi (1987), p.262.
 Courtis (1986), p.285.
 Adelberg (1979), Jones (1988), Baker and Kare (1992), Subramanian et al. (1993) and Li (2008)
 Bloomfield (2008), p.249.
 Courtis (1986), Rutherford (2003) and Smith et al. (2006)
 Stittle (2003), pp.3.
 Downes/Goodman (2003), p.118.
 Courtis (1995), p.4.
 Courtis (1995), p.4.
 Strieder (2003), p.34.
 Strieder (2003), pp.35.
 Bloomfield (2008), p.249.
 Elliot/Elliot (2006), p.127.
 Elliot/Elliot (2006), p.127.
 Korn (1997), p.63.
 Strieder (2003), p.25.
 Stolowy/Lebas (2006), p.103.