Does the linguistic complexity of annual reports affect the corporate leasing decision?

Abstract

Using a sample of 94,697 US firm-year observations from 1994 to 2017, we document that annual report complexity is positively and significantly associated with a firm’s operating lease ratio. In addition, we find that financially constrained and weakly governed firms with complex financial reports lease more. Finally, by employing a difference-in-differences method with the Plain Writing Act 2010 and a regression discontinuity design with eXtensible Business Reporting Language (XBRL) adoption, we find that the positive association is highly likely to be causal. Overall, our study shows that firms with linguistically complex annual reports strategically choose to use leasing as an alternative source of funding.