Readability of Annual Reports and Operating Performance of Indian Banking Companies

Abstract

Existing literature focuses on the evaluation of the readability of annual reports of non-banking companies. However, banking companies’ opaque nature and a double motivation to abuse accounting discretion requires a separate study on the readability of banks’ annual reports in association with their performance. We, therefore, attempt to explore firm performance and readability of banking firms’ annual reports in India. Net interest margin (NIM) and Fog Index are used as performance and readability variables respectively. We find that management discussion and analysis (MD&A) of the Indian banks is difficult to read. However, when we compare it with existing literature, Indian banks’ MD&A is difficult but not unreadable. Panel data regression analysis shows that firm performance would have a negative impact on the Fog Index. Further analysis of good and weak performing banking firms shows that the effect of NIM on Fog Index is higher in the case of weak performing banks. Empirical results affirm that firms with weak performance would structure their annual reports to veil adverse information in unfavourable situations. Consistent with the opaque nature of banks and incomplete revelation, managers of banks make MD&A harder to read to cover up the causes of weak performance. Application of readability index in case of banking companies in an emerging economy in association with performance is the contribution of this paper. An assessment of the readability of annual reports is an interesting topic for research to better understand the recent negative developments in Indian banking industry such as high non-performing assets, continuously declining return on assets, sharp increase in banking frauds and poor governance.

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