This study examines the association between the political corruption of a local government and the readability of firms’ annual reports. Based on a sample of 12,742 firm-year observations during the 2006–2014 period, the study reveals that firms located in more corrupt regions tend to disclose less readable financial reports. Our additional analyses reveal that the level of annual report readability is lower for firms located in more corrupt regions, regardless of the firms’ level of return on assets. We also find that firms located in more corrupt regions and having more able managers are more likely to obfuscate information in annual reports. The results imply firms’ effort to minimise rent extraction from corrupt government officials. A further test shows that firms in more corrupt regions are more likely to report less readable Management Discussion and Analysis (MD&A) section of annual reports. This paper extends the prior literature on annual report readability and political corruption. The paper also provides additional evidence to the mixed results on the management's obfuscation behaviour related to the readability of financial disclosures. The findings may be of interest to regulators seeking out factors influencing firms’ readability of annual reports.

本研究考察了地方政府的政治腐败与公司年度报告的可读性之间的关系。根据 2006-2014 年期间对 12,742 个公司年度的观察样本，该研究表明，位于腐败程度较高地区的公司往往披露的财务报告可读性较差。我们的额外分析表明，无论公司的资产回报水平如何，位于腐败程度较高地区的公司的年度报告可读性水平较低。我们还发现，位于更腐败地区和拥有更能干经理的公司更有可能在年度报告中混淆信息。结果表明公司努力减少从腐败的政府官员那里收取的租金。进一步的测试表明，腐败程度较高地区的公司更有可能在年度报告中报告可读性较差的管理讨论与分析 (MD&A) 部分。本文扩展了先前关于年度报告可读性和政治腐败的文献。该文件还为管理层混淆财务披露的可读性行为的混合结果提供了额外的证据。这些发现可能对寻求影响公司年度报告可读性的因素的监管机构感兴趣。