Explain a model for measuring the tone of financial statements using a multi-criteria decision model with a fuzzy approach

Document Type : Research Paper

Authors

1 PhD Student in Accounting, Islamic Azad University, Ali Abadktol Branch, Ali Abadktol, Iran

2 Assistant Professor, Department of Accounting, Islamic Azad University, Ali Abadktol Branch, Ali

3 Assistant Professor, Department of Accounting, Islamic Azad University, Ali Abadktol Branch, Ali Abadktol, Iran

4 Department of Accounting, Aliabad Katoul Branch, Islamic Azad University, Aliabad Katoul, Iran

Abstract

Despite the existence of financial reporting rules and requirements, including corporate governance, sustainability and social responsibility in companies, the complexity of financial reporting is still a controversial issue in the financial field and no comprehensive indicator has been provided so far. Although in previous studies, several indicators have been used to measure the readability of financial reporting, but in this study, by considering different indicators, using a mathematical method, a comprehensive indicator for measuring the readability of financial reporting has been presented. Also, to test and measure the efficiency of the designed model, data related to 152 companies during the years 2016 to 2019 have been used by mixed method. For this purpose, a questionnaire was prepared and distributed among experts to ask the experts about the weight and importance of the criteria for measuring the readability of the company's financial reporting. Indigenous model of financial reporting based on companies listed on the Tehran Stock Exchange was presented. Also, in order to measure the relationships of the hidden variable, which in this study is the readability of financial reporting, confirmatory factor analysis was used with its measurement items; the obtained results show that the proposed model is a good indicator for the readability of financial reporting and has less skewness than individual criteria.

Keywords

[1] A. Ajina, M. Laouiti and B. Msolli, Guiding through the fog: Does annual report readability reveal earnings
management? Res. Int. Bus. Fin. 38 (2016) 509–516.
[2] M. K. Bakarich, M. Hossain, M. Hossain and J. Weintrop, Different time, different tone: Company life cycle, J.
Contem. Acc. Econ. 15(11) (2019) 69–86.
[3] K.A. Bentley-Goode, T.C. Omer and B.J. Twedt, Does business strategy impact a firm’s information environment?, J. Acc. Aud. Fin. 34(4) (2019).
[4] S.B. Bonsall and B.P. Miller, The impact of narrative disclosure readability on bond ratings and the cost of debt,
Rev. Acc. Stud. 22(2) (2017) 608—643.
[5] I. Dadashi and M. Norouzi, Investigating the mediating effect of financial reporting readability on the relationship
between earnings management and capital expenditure, Accounting knowledge, articles ready for publication,
digital ID, 10.22103 / jak.2020.11718.2629.
[6] V. Dickinson, Cash flow patterns as a proxy for firm life cycle, Account. Rev. 86 (6)(2011) 1969—1994.
[7] M. Ertugrul, J. Lei, J. Qiu and C. Wan, Annual report readability, tone ambiguity, and the cost of borrowing, J.
Fin. Quant. Anal. 52(2) (2017) 811–836.
[8] R. Faff, W.C. Kwok, E.J. Podolski and G. Wong, Do corporate policies follow a life-cycle? J. Bank. Fin. 69
(2016) 95-–107.
[9] H. Fakhari and Y. Rezaei Pitenoei, Explain a model for measuring the company’s information environment, Fin.
Acc. 9(33) (2017) 121–147.
[10] FASB (Financial Accounting Standards Board). (2010). Statement of Financial Accounting Concepts No. 8.
Conceptual Framework for Financial Reporting, Chapter 1, the Objective of General Purpose Financial Reporting,
and Chapter 3, Qualitative Characteristics of Useful Financial Information, Norwalk, CT: FASB.
[11] Financial Accounting Standards Board (FASB). (2009). Statement of Financial Accounting Concepts No. 8.
Conceptual Framework for Financial Reporting, Chapter 1, the Objective of General Purpose Financial Reporting,
and Chapter 3, Qualitative Characteristics of Useful Financial Information. Norwalk, CT: FASB.
[12] A. Habib, and M.M. Hasan, Business strategies and annual report readability, Acc. Fin. 60(3) (2020) 2513–2547.
[13] M.M. Hasan, Managerial ability, annual report readability and disclosure tone, (April 23, 2017). Available at
SSRN: https://ssrn.com/abstract=2957135.
[14] C. E. Helfat and M. A. Peteraf, The dynamic resource-based view: Capabilities lifecycles, Strat. Manag. J. 24
(2003) 997—1010.
[15] B. E. Hendricks, M. H. Lang and K.J. Merkley, Through the Eyes of the Founder: CEO Characteristics and
Firms’ Regulatory Filings. Working paper, 2017.
[16] X. Huang, S.H. Teoh and Y. Zhang, Tone management, Account. Rev. 89(3) (2014) 1083—1113.
[17] Z. Khani Masoomabadi and H. Rajab Dori, Relationship between readability of financial reporting and bold tax
policy using a system of simultaneous equations, Fin. Accoun. Res. 11(1) (2019) 54–41.
[18] J. Kim, Y. Kim and J. Zhou, Languages and earnings management, J. Account. Econ. 63(2–3) (2017) 288-–306
[19] R. Li Lehavy and K. Merkley, The effect of annual report readability on analyst following and the properties of
their earnings forecasts, Acc. Rev. 86(3) (2011) 1087—1115.
[20] F. Li, Annual report readability, current earnings, and earnings persistence, J. Acc. Eco. 45(2) (2008) 221–247
[21] E. K.Y. Lim, K. Chalmers and D. Hanlon, The influence of business strategy on annual report readability, J. Acc.
Public Policy, 37(1) (2018) 65–81
[22] K. Lo, F. Ramos and R. Rogo, Earnings management and annual report readability, J. Account. Econ. 63(3)
(2017) 1—25.
[23] T. Loughran and B. McDonald. When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks, J.
Fin. 66 (2011) 35—65.[24] J.h. Luo, X. Li and H. Chen Annual report readability and corporate agency costs, China J. Acc. Res. 11(3) (2018)
187–212.
[25] M. Martikainen, A. Miihkinen and L. Watson, Board characteristics and disclosure tone, Working paper. Retrieved
from: https://warrington.ufl.edu/accounting/ docs/2016 Paper3.pdf.
[26] D. Miller and P.H. Friesen, A longitudinal study of the corporate life cycle, Manage. Sci. 30(10) (1984) 1161—1183.
[27] M. Mir Ali, F. Gholami Moghadam and R. Hesarzadeh, Investigating the relationship between financial reporting
tone and the future performance of the company and the stock market return of Tehran Stock Exchange, Know.
Fin. Acc. 5(3) (2018) 81–98.
[28] A. Mohseni and F. Rahnamai Rudposhti, Financial performance and functions of text tone management in
financial reporting, Empirical Acc. Res. 9(2) (2019) 48–29.
[29] M. Norouzi, K. Azinfar, I. Abbasiand I. Dadashi, Model design and evaluate the moderating role of corporate
governance on the relationship between financial reporting readability and agency costs, Fin. Manag. Strat. articles
ready to be published, digital code 10.22051 / jfm.2019. 24896.1999.
[30] M. Norouzi, K. Azinfar, I. Abbasi and I. Dadashi, I. Model design and evaluate the adjusting role of management
ability on the relationship between financial reporting readability and agency cost, Fin. Acc. Res. 12(1) (2019)
1–18.
[31] M. Purkarim, S. Jabbarzadeh Kongerloui, S. Bahri, S, Jamal and H. Qalavandi, The effect of earnings management
on the tone of financial reporting in the Iranian accounting system, Fin. Acc. Res. 10(3) (2018) 44–21.
[32] M. Safari Gerayli and Y. Rezaei Pitenoei, Managerial ability and financial reporting readability: A test of signaling
theory, J. Knowledge Acc. 9(2) (2018) 191–218.
[33] M. Safari Gerayli and Y. Rezaei Pitenoei, Business strategy and readability of financial reporting, Fin. Acc. Quart.
11(42) (2019) 130–150.
[34] M. Safari Gerayli, Y., Rezaei Pitenoei and N. Mohammad, Earnings management and financial reporting: An
empirical test of the opportunistic approach, Auditing Knowledge, 17(69) (2017) 230–217.
Volume 12, Special Issue
December 2021
Pages 297-309
  • Receive Date: 17 March 2021
  • Revise Date: 28 April 2021
  • Accept Date: 16 May 2021