Determinants and Consequences of Annual Report Tone and Readability: Evidence from the UK FTSE 350 Listed Firms
Authors:   , Mohammed Ahmed 
Published: December 2022

Reported narratives incorporate statements and annual reports play a crucial role in promoting effective communication between managers and stakeholders. Unsophisticated stakeholders depend on reported narratives as they cannot make decisions based on financial statement numbers alone. Despite the importance of reported narratives, no regulations exist to offer guidance on how publicly listed UK firms present narratives to this date. Moreover, there is still limited academic evidence on the determinants and consequences of the complexity of reported narratives. Hence, the main objective of this thesis is to investigate whether managers obfuscate and manipulate FTSE 350 annual reports’ narratives using tone and readability. This thesis also contributes to the literature by demonstrating in the second chapter, Can the tone and readability of annual reports predict firm performance? For 2013-2018. The third chapter examines the effect of board characteristics on reported narratives, evidence from FTSE 350 Firms for 2013-2017. The third chapter primarily focuses on the age of CEO and female executives as determinants of board characteristics. The fourth chapter assessing corporate social responsibilities (CSR) performance through tone and readability, evidence from FTSE 350 for 2013-2018. This study collects financial data from Thomson Reuters; corporate governance data from BoardEx; Environmental, Social and Governance (ESG) data from Asset 4; narratives data extracted from the annual reports manually. This study measures tone of narratives using sentiment analysis and the readability using the FOG index. The study uses the software R to calculate tone and readability and STATA to apply the regression analysis. The second chapter’s findings show that tone of the different sections of the same annual report positively associates with FTSE 350 company’s future performance, and readability indicates an insignificant association with future performance. Suggesting that managers use tone to highlight their firms expected good performance but do not use readability to present easy-to-read or complex narratives. The third chapter indicates that the CEO’s age is not associated with tone but is positively associated with less readable reports. Indicating that young managers present transparent narratives. Furthermore, female executives show insignificant associations with tone and are negatively related to less readable reports. Indicating that the presence of female executives increases the narrative's clarity. The fourth chapter shows that FTSE 350 firms’ CSR performance, generally, has an insignificant relationship with tone and readability of CSR reports. Overall, the results reported in this thesis indicate that tone and readability are essential tools for understanding FTSE 350 firms. This thesis contributes to the literature regarding tone and readability of annual reports. Most studies focus on US firms, and it is difficult to generalise the findings of the US studies against that of other countries. Moreover, most UK studies did not investigate UK firms sufficiently and focus on a small sample of UK firms. The study enhances the theoretical arguments which support the use of obfuscation as a tool to hide poor performance and improve the understanding of the use of obfuscation in voluntary disclosure of annual reports narratives. This thesis enhances prior studies that did not sufficiently examine the relationship between CEOs’ age or female executives with FTSE 350 firms’ tone and readability. This study also contributes to the literature and investigates the CSR reports because they are essential in framing a good picture of companies’ managers who may use them to improve corporate reputation. Finally, the findings will help policymakers reduce the complexity and, in turn, increase the applicability of corporate reporting.