Does the annual report readability improve corporate R&D investment? Evidence from China

Our study investigates the association between annual report readability and corporate R&D investment decisions. We argue that a more readable annual report enhances investors’ disclosure processing fluency and lowers information asymmetry, which mitigates insufficient funds and thus improves R&D investment levels. By exploring a panel sample of 26,359 firm-year observations for the period of 2007–2019 based on China’s A-share listed firms, we find that increased readability of annual reports is associated with higher R&D investment. These results hold after a series of robustness checks. Mediation analysis reveals that annual report readability prompts R&D investment mainly through reducing financial constraints and supervising tunneling behaviors. Cross-sectional tests suggest that the positive association between readability and R&D investment is more pronounced in lower managerial manipulating incentives and lower disclosure processing ability of investors and exists peer spillover effects. Our results provide a novel insight that the economic impact of qualitative discourses can extend to management’s financial decisions. Our study contributes to the literature on annual report readability and R&D under-investment governance.