The Effect of Corporate Governance Components and Corporate Strategy on The Tone and Readability of Financial Reporting

Abstract

The primary aim of this study was to model the factors influencing the tone and readability of financial reporting, focusing on corporate governance components and corporate strategies in the Tehran Stock Exchange. The research considered corporate governance components such as managerial ownership, institutional ownership, familial ownership, board size, board independence, gender diversity within the board, independence of the auditing committee, frequency of auditing committee meetings, and the size of the auditing committee. Additionally, corporate strategies, categorized as defensive and offensive strategies, were analyzed as independent variables. The dependent variables in this study were the tone and readability of financial reporting. The statistical sample comprised 125 companies from 2013 to 2022, with data analyzed using multiple regression tests. Findings from the first and second hypotheses revealed that institutional ownership, board independence, auditing committee independence, and the offensive strategy had a positive and significant effect on the tone of financial reporting. Conversely, managerial ownership, familial ownership, and the defensive strategy exhibited a negative and significant effect on the tone. Similarly, results from the third and fourth hypotheses showed that the number of auditing committee meetings, board independence, auditing committee independence, and the offensive strategy positively and significantly influenced financial reporting readability. In contrast, managerial ownership, familial ownership, and the defensive strategy negatively and significantly affected readability. The coefficients of determination indicated that corporate governance components and corporate strategies accounted for 62.7% of the variation in financial reporting tone and 74.3% of the variation in financial reporting readability, respectively.