The Impact of Financial Performance Towards Annual Report Readability: Analysis of Mediating Impact of Disclosure’s Sentiment

Abstract

Several literatures show the existence of opportunistic behavior of the company’s management that intends to cover up the company’s performance through the information disclosures using particular strategies. This study examines the direct effect of financial performance on the annual report readability. Furthermore, this study investigates the mediation effect of annual report sentiment on the influence between the financial performance and the annual report readability. This study is a quantitative research using secondary data in the form of financial reports and Management and Discussion Analysis in the company’s annual report. The population comprises manufacturing companies listed on the Indonesia Stock Exchange (IDX) during 2016-2021. Based on the purposive sampling method, this study uses 85 companies as the sample. This study uses ROA as an indicator of financial performance and the Gunning Fog index as an indicator of the annual report readability. The sentiment in the text of the annual report is measured using the Valence Aware Dictionary and Sentiment Reasoner (VADER) method with the help of the Orange Data Mining application. The analyses used to test the hypotheses are the regression analysis and the sobel test. The result of this study indicates that financial performance does not have a direct effect on the annual report readability. However, this study finds that financial performance has an indirect effect on the annual report readability through the mediating role of the annual report sentiment.