Narrative Disclosure Choice, Financial Literacy and the Cooperative Banking Sector - A Combined Analysis of Financial Disclosure Readability under Consideration of Spatial Heterogeneity
Abstract
Narrative disclosure is a key basis for predicting future returns of a company and impacts strategic decisions of investors and other stakeholders, if it is designed in a way that the addresses can use it as an effective source of information. Therefore, readability of narrative disclosure is a major field in recent accounting research, but only a few studies pay attention to what is influencing this readability. This study examines the impact of regional financial literacy on the readability of narrative disclosure in annual reports of cooperative banks in North Rhine-Westphalia, Germany. We contribute to the existing literature with a unique approach that introduces the characteristics of the reports' target audiences to possible determinants of narrative disclosure readability. We analyze the readability of the narrative parts of the financial statements using various readability measures and employ a seemingly unrelated regression model that allows us to combine multiple equations with spatial heterogeneity. Our analyses show a negative correlation between the reading level difference and the average amount of a cooperative bank's average member's shares and liability amount. Furthermore, the readability of cooperative banks' narrative disclosure settles above the average regional education level, where an increase in a region's educational level corresponds to an increase in financial terminology in the reports. This suggests not only a theoretical advantage to designing the readability of narrative disclosure appropriate to the target group but hints at legitimate benefits for the cooperatives.