The Impact of Annual Report Transparency and Readability on the Use of Business Failure Prediction Models.

Abstract

The study aims to explain if the transparency and readability of the information released in the annual report affect the use of business failure prediction models. This study reports the results of an examination of the relation between the information transparency and readability in annual reports, on the use of business failure prediction models. Specially, this research aims to explain if the transparency and readability of the information released in the annual report affect the use of business failure prediction models. To explain this relationship, this study tested several hypotheses by using a correlation and a multiple regression analysis based on the primary data collected from a sample of 155 professionals using survey method. Some of the findings of this research indicate the following: (1) annual report transparency is significant correlated to the use of business failure prediction models; (2) annual report readability is not significant correlated to the use of business failure prediction models; (3) the transparency and readability of annual reports are significantly correlated; (4) the transparency and readability in the annual reports are not significant to explain changes in the use of business failure prediction models; (5) improvements on transparency, disclosure, the presentation of the financial statements or complementary information in annual reports could increase the business failure prediction. The results indicated that the studied variables together do not affect the use of business failure prediction model. Nevertheless, transparency and readability are correlated, but the correlation is weak as there could be other variables involve. Some of the suggested other variables were identified in this study. However future research is recommended. Moreover, as cases of business failure continue to be common across the world, future research on this topic is recommended in order to understand the variables that could improve the business failure prediction based on the information disclosed by companies given that the current literature do not fully assess this problem. In addition, this research highlights the need to define a standardize measure of information transparency and readability.