Unlocking financial clarity: how tournament incentives influence the readability of financial reporting

Hoa Luong, Ammad Ahmed and Muhammad Nadeem

Meditari Accountancy Research, 2025, vol. 34, issue 1, 1-35

Abstract: PurposeThis study aims to explore the impact of tournament incentives among executives on the readability of 10-K financial reports. This research addresses a gap in understanding how these incentives might adversely affect a firm’s information environment, which is crucial for informed investor decision-making and for policymakers mandating the readability of financial statements.Design/methodology/approachThis study comprehensively analyzes US firms from 1999 to 2018. The research methodology includes detailed examinations of the potential channels through which these incentives influence report readability, such as managerial unethical conduct and risk induction. It also investigates the moderating effects of specific external governance mechanisms on this association. The robustness of the findings is ensured through various endogeneity tests and the utilization of alternative proxies.FindingsThe findings reveal a negative association between executive tournament incentives and the readability of 10-K financial reports. This relationship is found to be mediated through factors like managerial unethical behavior and risk elements inherent in the firm’s operations. However, it is observed that specific external governance mechanisms can weaken this negative association.Originality/valueThis research contributes uniquely to the existing literature by highlighting the previously unexplored pathway through which tournament incentives among executives can deteriorate firms’ information environment. It highlights the crucial need to consider executive tournament incentives as a significant determinant of financial report readability in legal mandates. The study’s comprehensive approach and robust methodology advance the understanding of the association between executive incentives and financial reporting clarity, offering valuable insights for investors and policymakers alike.

Keywords: Tournament incentives; Financial statement readability; Corporate governance (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:medarp:medar-02-2024-2377

DOI: 10.1108/MEDAR-02-2024-2377

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