The readability of narrative disclosures and earnings management : Empirical evidence from the GCC banking sector

Abstract

This chapter empirically examines the association between earnings management (EM) and the readability of the narrative disclosures (RNDs) of 61 listed banks in the Gulf Cooperation Council (GCC) countries during the period 2014–2017. Inspired by the impression management and agency theories, we developed hypotheses to explore whether GCC bank managers prepare narratives that reflect the true economic condition of their banks or conceal their engagement in EM activities (obfuscation). The results, in general, indicated that bank managers who are involved in EM prepare complex annual reports. Further analyses found that when managers are involved in income-decreasing EM activities, they prepare difficult-to-read annual reports to conceal the bad news of reduced earnings (obfuscation). In contrast, when managers engage in income-increasing EM, they communicate easy-to-read annual reports to signal this good news of higher income to the market participants (impression management). The findings of this empirical chapter are expected to be of interest to academics, managers of banks, policymakers and international investors.