Does the annual report readability improve corporate R&D investment? Evidence from China

Ya-Guang Du (), Shu Li (), Nan-Ting Kuo () and Dan Li ()
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Ya-Guang Du: Beijing University of Posts and Telecommunications
Shu Li: Nankai University
Nan-Ting Kuo: Shandong University of Technology
Dan Li: Tianjin University of Technology

International Journal of Disclosure and Governance, 2025, vol. 22, issue 2, No 9, 440-460

Abstract: Abstract Our study investigates the association between annual report readability and corporate R&D investment decisions. We argue that a more readable annual report enhances investors’ disclosure processing fluency and lowers information asymmetry, which mitigates insufficient funds and thus improves R&D investment levels. By exploring a panel sample of 26,359 firm-year observations for the period of 2007–2019 based on China’s A-share listed firms, we find that increased readability of annual reports is associated with higher R&D investment. These results hold after a series of robustness checks. Mediation analysis reveals that annual report readability prompts R&D investment mainly through reducing financial constraints and supervising tunneling behaviors. Cross-sectional tests suggest that the positive association between readability and R&D investment is more pronounced in lower managerial manipulating incentives and lower disclosure processing ability of investors and exists peer spillover effects. Our results provide a novel insight that the economic impact of qualitative discourses can extend to management’s financial decisions. Our study contributes to the literature on annual report readability and R&D under-investment governance.

Keywords: Annual report readability; R&D investment; Disclosure processing costs; Financial constraints; Tunneling (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41310-024-00240-9

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