Gangadha an, Vismaya; Padmakuma i, Lakshmi
A icle
Annual epo eadabili y and s ock e u n synch onici y:
E idence om India
Cogen Economics & Finance
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Taylo & F ancis G oup
Sugges ed Ci a ion: Gangadha an, Vismaya; Padmakuma i, Lakshmi (2023) : Annual epo
eadabili y and s ock e u n synch onici y: E idence om India, Cogen Economics & Finance, ISSN
2332-2039, Taylo & F ancis, Abingdon, Vol. 11, Iss. 1, pp. 1-22,
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Annual epo eadabili y and s ock e u n
synch onici y: E idence om India
Vismaya Gangadha an & Lakshmi Padmakuma i
To ci e his a icle: Vismaya Gangadha an & Lakshmi Padmakuma i (2023) Annual epo
eadabili y and s ock e u n synch onici y: E idence om India, Cogen Economics & Finance,
11:1, 2186034, DOI: 10.1080/23322039.2023.2186034
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FINANCIAL ECONOMICS | RESEARCH ARTICLE - REPLICATION STUDY
Annual epo eadabili y and s ock e u n
synch onici y: E idence om India
1
Vismaya Gangadha an
1
* and Lakshmi Padmakuma i
1
Abs ac : This s udy in es iga es he ela ionship be ween he comp ehensibili y o
a i m’s annual epo and i s s ock e u n synch onici y in he Indian ma ke . The
s udy employs he eadabili y o annual epo s as a measu e o he cos o
in o ma ion p ocessing. The indings sugges ha i ms wi h mo e eadable annual
epo s end o display highe s ock e u n synch onici y. This ela ionship implies
ha mo e legible inancial disclosu es a e associa ed wi h mo e e icien and
anspa en capi al ma ke s. Addi ionally, he esea ch disco e ed ha he ela-
ionship be ween eadabili y and s ock e u n synch onici y is pa icula ly p o-
nounced o companies wi h high ins i u ional in es men , high analys co e age,
and lowe in o ma ion asymme y. The sample size o he s udy encompasses NSE
500 companies o he pe iod 2015–2016 o 2019–2020.
Subjec s: Co po a e Finance; In es men & Secu i ies; Business E hics
Keywo ds: Annual epo eadabili y; Analys ollowing; Ins i u ional in es o s;
In o ma ion asymme y; Synch onici y
JEL Classi ica ion: G10; G14
1. In oduc ion
How anspa en and accu a e is he in o ma ion en i onmen in he eme ging ma ke s has always
been a conce n o esea che s; because esea che s we e suspicious abou he co po a e go e n-
ance sys em, le el o in o ma ion asymme y, and ma ke e iciency in eme ging ma ke s (Fa ooq
& Ahmed, 2014; Fa ooq & Hamouda, 2016). I has been es ablished ha he quali y o he
in o ma ion en i onmen in luences he pe o mance o s ocks in he ma ke . The alue o
a company’s s ock e lec s he a ailabili y o in o ma ion a he indus y, ma ke , and i m-
speci ic le el. The speed a which in es o s inco po a e his in o ma ion in o s ock p ices de e -
mines he ad an ages o hese in es o s. The s ock p ice luc ua es as a esul o he inco po a-
ion o speci ic in o ma ion abou he i m in o he s ock p ices (Pio oski & Rouls one, 2004). The
inco po a ion o in o ma ion in o he s ock p ices de e mines he co-mo emen o s ock e u n
wi h he ma ke e u n. S ock e u n synch onici y (he ea e Synch onici y) “measu es he co-
mo emen o a i m’s e u n wi h he ma ke e u n and he ex en o which indus y and ma ke
e u ns explain he a iabili y in indi idual s ock e u n”(Du ne e al., 2003). E idence indica es
ha in o ma ion anspa ency and asymme y a e essen ial de e minan s o Synch onici y (Fa ooq
& Ahmed, 2014). To a g ea ex en , in o ma ion anspa ency can be cap u ed om he disclosu e
p ac ices; because he inancial disclosu es a e public documen s, and hey a e he p ima y sou ce
o in o ma ion o he in es o s. Hence disclosu e p ac ices play an essen ial ole in de e mining he
in o ma ion en i onmen .
Gangadha an & Padmakuma i, Cogen Economics & Finance (2023), 11: 2186034
h ps://doi.o g/10.1080/23322039.2023.2186034
Page 1 o 22
Recei ed: 05 Oc obe 2022
Accep ed: 25 Feb ua y 2023
*Co esponding au ho : Vismaya
Gangadha an, Finance and
Accoun ing a ea, IFMR GSB, K ea
Uni e si y, S ici y, Andh a P adesh,
India
E-mail: [email p o ec ed]
Re iewing edi o :
Da id McMillan, Uni e si y o S i ling,
S i ling Uni ed Kingdom
Addi ional in o ma ion is a ailable a
he end o he a icle
© 2023 The Au ho (s). This open access a icle is dis ibu ed unde a C ea i e Commons
A ibu ion (CC-BY) 4.0 license.
Publicly aded i ms publish inancial disclosu es on a con inual basis. Financial disclosu es like
he annual epo s a e manda o y acco ding o he egula ion (Secu i ies Exchange Boa d o India
(Annual Repo s) Rules, 1994), bu i ms some imes olun a ily publish addi ional disclosu es o
p o ide mo e in o ma ion o he s akeholde s. Amongs all he manda o y disclosu es, annual
epo s a e he mos comp ehensi e disclosu e, which includes de ailed in o ma ion abou he
inancial and non- inancial ac i i ies o a i m du ing he pas inancial yea . Gene ally, an annual
epo con ains inancial s a emen s, highligh s o he pe o mance om he p eceding yea ,
cu en pe o mance, a le e om he Chie Execu i e O ice (CEO), and ou look o u u e
yea s. Acco ding o he Secu i ies and Exchange Boa d o India (SEBI), an annual epo should
con ain a ull and ai pic u e o he ac i i ies, policies, and p og ammes unde aken du ing he
pas inancial yea . Mo eo e , annual epo s published by companies a e he main sou ce o
in o ma ion o he capi al ma ke pa icipan s. Abou 80% o an annual epo is ex ; hence
p ope comp ehension is essen ial o ensu e he use ulness o he in o ma ion (Cheng e al.,
2018). The e o e, ex ual p ope ies like eadabili y impac he e ec i eness o communica ing
ele an in o ma ion be ween he i m and ma ke pa icipan s (E ug ul e al., 2017). Readabili y
enhances he use ulness and in o ma i eness o he con en . Following Kla e, (2000), eadabili y in
his pape is de ined as he “ease o unde s anding due o he s yle o w i ing”.
All he publicly a ailable in o ma ion is ac o ed in o he s ock p ices as pe he semi-s ong
E icien Ma ke Hypo hesis (EMH). Semi-s ong EMH does no hold when he inancial disclosu es
a e complex; because he in o ma ion usage educes due o he di e ences in he in o ma ion
p ocessing expe ise among he use s. The Incomple e Re ela ion Hypo hesis (IRH) pos ula es ha
in o ma ion ha incu s signi ican cos in e ms o p ocessing and ex ac ion om inancial
disclosu es ends o be less comple ely in eg a ed in o ma ke p ices (R. Bloom ield, 2008).
Hence he chances o in o ma ion asymme y a e highe when he inancial disclosu es a e less
eadable. E en i he in o ma ion is publicly a ailable, hey a e no always use ul o unin o med
in es o s. Secu i ies Exchange Commission (SEC) a gues ha disclosu es ha a e easie o unde -
s and imp o e he con en ’s in o ma i eness; i can be e in o m he in es o s abou he i m
pe o mance (SEC 1998). As Annual Repo Readabili y (he ea e ARR) dec eases, he associa ed
cos o in o ma ion p ocessing inc eases. This in u n leads o a decline in he quali y o disclosu es.
This is because complex disclosu es necessi a e ha use s expend mo e e o and ime o iden i y
and ex ac ele an in o ma ion o hei use (R. Bloom ield, 2008; Li, 2008). G ossman and S igli z
(1980) ind ha when he ex ual con en s a e cos lie o p ocess and unde s and a e no
comple ely inco po a ed in he s ock p ices.
The Managemen Ob usca ion Hypo hesis (MOH) s a es ha manage s in en ionally ob usca e
poo pe o mance o ad e se in o ma ion ha hey hink may a ec ma ke pe o mance (Li,
2008). Li (2008) and De Souza e al. (2019), ind i ms wi h lesse ea nings end o epo complex
inancial disclosu es. Acco ding o he MOH, he managemen is no neu al in p esen ing i m
pe o mance in public disclosu es, which esul s in bias. R. J. Bloom ield (2002) inds ha manage-
ial decisions a e some imes mo i a ed by an in en ion o make i ha de o he use s o unco e
in o ma ion ha he manage s do no wan o e lec in he s ock p ices. Such ad e se in o ma ion
includes; poo pe o mance, ea nings managemen , accoun ing auds, accoun ing manipula ions,
e c., (Ajina e al., 2016; R. Bloom ield, 2008; C aig e al., 2013; Li, 2008; Lo e al., 2017; Sub amanian
e al., 1993). The e o e, by in en ionally obscu ing inancial disclosu es, manage s aim o p e en
he ad e se in o ma ion om being e lec ed in he i m’s s ock p ices o , in some ins ances, o
delay i s inco po a ion in o s ock p ices (Li, 2008).
In mos si ua ions, publishing eadable disclosu es makes all capi al ma ke pa icipan s be e
o ; because hey equi e mo e cos ly in o ma ion in he absence o such public announcemen s
(Diamond, 1985). Mo eo e , e ealing public in o ma ion educes in o ma ion asymme y
(Diamond & Ve ecchia, 1991). Acco ding o Li (2008), he a ailabili y o public disclosu es is no
enough o educe in o ma ion asymme y; because he in o ma ion p ocessing abili y is no he
same o all use s (Indjejikian, 1991). Gi en ha he e exis a ia ions in expe ise ela ed o he
Gangadha an & Padmakuma i, Cogen Economics & Finance (2023), 11: 2186034
h ps://doi.o g/10.1080/23322039.2023.2186034
Page 2 o 22
p ocessing o in o ma ion, inancial analys s and o he in o ma ion in e media ies a e able o
de i e bene i om hei analysis o i ms by selling hei ecommenda ions and opinions o
use s. Tha means public disclosu es wi h high eadabili y a e essen ial o educing in o ma ion
asymme y.
K ipke (1973), howe e , opines ha he p ima y use s o he in o ma ion om he inancial
disclosu es should be he p o essionals like analys s and ins i u ional in es o s and no he
unsophis ica ed “lay” in es o s. The unsophis ica ed in es o s migh no ha e he expe ise o
comp ehend and unde s and he inancial disclosu es. Hence, he e o s o make he disclosu es
eadable o a “lay” in es o a e a was e o money and ime. Ne e heless, since he pa icipa ion
o unin o med in es o s is signi ican in he capi al ma ke , imp o ing in o ma ion anspa ency is
essen ial o p o ec ing he in e es s o hose unin o med in es o s. The egula o s canno igno e
hei in o ma ion needs. Acco ding o Jin & Mye s, (2006), weak in es o p o ec ion igh s and he
opaqueness o in o ma ion mo e oge he . Poo in es o p o ec ion igh s gi e a chance o he
companies o ob usca e ad e se in o ma ion like poo pe o mance and ailu es, which he man-
agemen ea may ad e sely a ec he s ock p ices.
As Li (2008) con i ms, inc eased eadabili y makes he ex ual con en mo e unde s andable and
imp o es he in o ma i eness o he con en . Hence mo e eadable (less complex) disclosu es
esul in highe eac ions om he s akeholde s (Rennekamp, 2012). Aldose i & Melegy, (2023)
ound ha he e is a posi i e ela ionship be ween ARR and in o ma ion e iciency. Tha is o say,
as ARR inc eases, in o ma ion asymme y dec eases, he in o ma ion en i onmen becomes mo e
anspa en and inclusi e as in es o s a e able o ead & unde s and wi h less ime and be e
comp ehension. This also educed he in o ma ion p ocessing cos s. As a esul , his in o ma ion
symme y ge s e lec ed in s ock p ices leading o be e Synch onici y o a i m’s s ock p ice and
he ma ke mo emen s as shown below in Figu e 1.
This s udy aims o in es iga e he in luence o ARR on Synch onici y. Synch onici y, as de ined by
Bai e al. (2019), ep esen s he p opo ion o a ia ion in an indi idual s ock e u n ha can be
a ibu ed o ma ke e u ns. A high Synch onici y alue implies a s ong co ela ion be ween he
s ock e u n and he ma ke e u n.
Synch onici y
In o ma ion
en i onmen
In o ma ion
asymme y
Annual
epo
eadabili y
Figu e 1. Rela ionship be ween
ARR and Synch onici y.
Figu e 2. Concep ual
amewo k.
Gangadha an & Padmakuma i, Cogen Economics & Finance (2023), 11: 2186034
h ps://doi.o g/10.1080/23322039.2023.2186034
Page 3 o 22

The Indian capi al ma ke is an eme ging ma ke . This s udy aims o build upon he
esea ch conduc ed by Bai e al. (2019) by explo ing he ela ionship be ween ARR and
Synch onici y in he Indian capi al ma ke . The s udy acknowledges ha he indings o Bai
e al. (2019) may no be gene alizable o all coun y se ings due o a ia ions in in es o
p o ec ion, go e nance, and in o ma ion asymme y le els. The s udy also highligh s ha
he e a e no speci ic egula ions in India go e ning he eadabili y o inancial disclosu es,
and no p io esea ch has explo ed he associa ion be ween inancial disclosu e quali y and
Synch onici y in he Indian con ex . The e o e, he s udy seeks o ill his esea ch gap and
in es iga e he ela ionship be ween ARR and Synch onici y in he Indian capi al ma ke . In
addi ion o examining he di ec ela ionship be ween ARR and Synch onici y, he s udy also
aims o in es iga e he mode a ing e ec s o ins i u ional in es men , in o ma ion asymme-
y, and analys s ollowing on his ela ionship. This app oach is use ul in unde s anding how
hese ac o s may impac he ela ionship be ween ARR and Synch onici y in he Indian
con ex . O e all, his s udy has he po en ial o con ibu e o he li e a u e on inancial
disclosu e quali y and ma ke e iciency by p o iding insigh s in o he ela ionship be ween
ARR and Synch onici y in he Indian capi al ma ke and he ac o s ha may mode a e his
ela ionship.
This pape uses Fog Index eadabili y sco e o measu e he ARR o NSE 500 i ms. The indings o
he pape indica e a posi i e ela ionship be ween ARR and Synch onici y, signalling ha in India,
as inancial disclosu es become mo e eadable, Synch onici y also imp o es due o highe ans-
pa ency and imp o ed in o ma ion con en ha is a ailable o he in es o s. The imp o ed ma ke
e iciency inc eases Synch onici y. Mo eo e , he posi i e ela ionship is mo e a enua ed o i ms
wi h highe ins i u ional in es men , highe analys ollowing, and lowe in o ma ion asymme y.
An enhancemen in ma ke e iciency leads o an inc ease in Synch onici y.
The subsequen sec ions o he pape a e o ganized as ollows: Sec ion 2 p esen s he exis ing
li e a u e e idence and hypo heses. Sec ion 3 p o ides in o ma ion on he da a and sample used.
Sec ions 4 and 5 p esen he empi ical models and esul s, espec i ely. Finally, Sec ion 6 con-
cludes he pape .
2. Li e a u e e iew and hypo hesis de elopmen
This sec ion e iews he li e a u e on ARR and Synch onici y. Annual epo s p o ide
a comp ehensi e accoun o a company’s inancial pe o mance o e he p eceding
inancial yea . The anspa ency o such inancial disclosu es is di ec ly ela ed o Synch onici y.
The quali y o he in o ma ion and he cos o p ocessing i can be de e mined by measu ing he
eadabili y sco es o annual epo s (Li, 2008). In his s udy, he eadabili y sco es o he annual
epo s se e as p oxies o he cos o in o ma ion p ocessing. Howe e , he e is limi ed e idence
on he ela ionship be ween disclosu e eadabili y and Synch onici y, pa icula ly in he Indian
con ex . Bai e al. (2019) ind a nega i e ela ion be ween ARR and Synch onici y in he US con ex .
The pape posi s ha when he cos o in o ma ion p ocessing is low (as e lec ed by high ARR),
in es o s a e able o u ilize he i m-speci ic in o ma ion ound in he annual epo s, which esul s
in a dec ease in synch onici y. In ac , his esul canno be gene alised o all coun ies; because
many o he ac o s like in es o p o ec ion egula ion, ype o in es o s in he ma ke , go e nance
sys em, le el o in o ma ion asymme y, e c., which a ies ac oss ma ke s, in luence he
Synch onici y o s ock e u n wi h he ma ke (Fa ooq & Ahmed, 2014; Jin & Mye s, 2006). The
p ima y causes o ine ec i e co po a e go e nance sys ems in eme ging ma ke s include he
dominance o amily con ol, inadequa e en o cemen o laws p o ec ing in es o s, and ine ec i e
egula ions (Claessens & Fan, 2002; Khwaja & Mian, 2005). Mo eo e , Leuz e al. (2009) ind ha
con olling sha es and managemen in eme ging ma ke s ob usca e ue in o ma ion om o he
s akeholde s.
Acco ding o Dasgup a e al. (2010) and Fa ooq & Ahmed, (2014), an imp o ed go e nance
sys em leads o highe Synch onici y; because a good go e nance sys em necessi a es a be e
Gangadha an & Padmakuma i, Cogen Economics & Finance (2023), 11: 2186034
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Page 4 o 22
in o ma ion en i onmen and ma ke e iciency which leads o inc eased Synch onici y. Fa ooq &
Ahmed, (2014), in hei s udy on he Indian capi al ma ke , used owne ship concen a ion, ope a-
ional complexi y, and analys ollowing as p oxies o co po a e go e nance. The pape asse s
ha high owne ship concen a ion leads o inadequa e in o ma ion disclosu e (Leuz e al., 2009),
i ms wi h signi ican ope a ional complexi y expe ience mo e se e e agency p oblems and g ea e
analys co e age p omo es a a o able in o ma ion en i onmen . The esea ch inds ha i ms
wi h highe analys co e age, lowe owne ship concen a ion, and less ope a ional complexi y
exhibi g ea e Synch onici y in India. Dasgup a e al. (2010) ind, “When he in o ma ion en i on-
men o a i m imp o es, and mo e i m-speci ic in o ma ion is a ailable, ma ke pa icipan s a e
able o imp o e hei p edic ions abou he occu ence o u u e i m-speci ic e en s. As a esul ,
he su p ise componen s o s ock e u ns will be lowe when he e en s a e ac ually disclosed, and
he e u n Synch onici y will be highe .”
In con as , Jin and Mye s (2006) ind ha Synch onici y will be highe o less anspa en
companies (opaque ), and Synch onici y is highe when inancial sys ems a e less de eloped.
Acco ding o Mo ck e al., (2000), compa ed o he de eloped coun ies, Synch onici y is highe
in eme ging economies, and i is mainly due o he di e ence in p ope y igh s. Mo e p i a e
in o ma ion will be capi alised in o he s ock p ices when he e is highe p o ec ion on public
sha eholde s’ igh s agains co po a e inside s. Tha means ine icien p ope y igh s p o ec ion
(poo e in es o p o ec ion) leads o high Synch onici y. N ow-Gyam i e al. (2015) ind ha
ins i u ional in es o s can in luence a company’s in o ma ion disclosu e p ac ices. Since he
ins i u ional in es o s a e la ge sha eholde s, he managemen will be cau ious abou sa is ying
hese in es o s because he ac ions o ins i u ional in es o s migh s ongly in luence he ma ke .
Mo eo e , ins i u ional in es o s a e la ge i ms ha usually ha e sys ems o closely moni o he
i m and managemen ac i i ies (Le e al., 2006). Due o he igh egula ion on ins i u ional
in es o s, he in o ma ion asymme y educes, which enhances he in o ma ion anspa ency
and esul s in lowe Synch onici y in Ghana.
As can be obse ed om he abo e e iew, he li e a u e p o ides mixed e idence on he
associa ion be ween in o ma ion anspa ency and Synch onici y, bu all he s udies con i m he
in o ma i eness o inancial disclosu e as an impo an de e minan o in o ma ion anspa ency,
which u he leads o Synch onici y.
The comp ehensibili y o inancial disclosu es has been a subjec o conce n o egula o s due o
hei suspicions ega ding he anspa ency o such disclosu es. As public disclosu es a e in ended
o he bene i o s akeholde s, i is impe a i e ha ma e ial in o ma ion is con eyed o hem. I
he i ms in en ionally hide ad e se in o ma ion om he in es o s by making inancial disclosu es
complex, hen he in es men made by common (unin o med) in es o s becomes meaningless.
Only inside s and he mos sophis ica ed in es o s like inancial analys s and ins i u ional in es o s
can make use o such cos ly, complex in o ma ion. The e o e, he anspa ency o in o ma i eness
o inancial disclosu es is an impo an elemen o p o ec ing he in o ma ion needs o he
in es o s; be e eadabili y indica es a be e in o ma ion en i onmen . Simila ly, Rennekamp
(2012) inds ha inancial disclosu es wi h highe eadabili y lead o s onge eac ions om
small in es o s. Mo eo e , ARR impac s in es o s’ eac ions o disclosed inancial in o ma ion. I
also a ec s he in es o s’ decisions o depend on ou side sou ces o ob ain mo e in o ma ion
(Sco Asay e al., 2017). The e a e ins ances whe e in es o s a e eluc an o in es in companies
ha lack anspa ency. Law ence (2013) inds ha indi idual in es o s a e less likely o in es in
i ms ha ha e complex annual epo s, as he in es o s lose con idence in a company when i s
disclosu es a e no anspa en .
The SEC o he US has made con inuous e o s o make he inancial disclosu es o publicly
aded companies eadable. Acco ding o he plain English disclosu e egula ion, he companies
adop ague o ma s and language in inancial disclosu es o hide ad e se in o ma ion om he
s akeholde s. Mo eo e , he a e age in es o may no clea ly unde s and less eadable disclosu es,
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esul ing in capi al ma ke ine iciency. Gene ally, he s udies on ARR con i m ha annual epo s
a e complex and “being inaccessible o a la ge p opo ion o p i a e lay in es o s” (Jones &
Shoemake , 1994). Li (2008)sugges s ha one po en ial mo i a ion o managemen o make
annual epo s less eadable may be o delay he in eg a ion o nega i e in o ma ion in o s ock
p ices. This is because he s ock ma ke ends o unde - eac o he na a i e con en o annual
epo s.
Annual epo s ep esen a c ucial means h ough which s akeholde s acqui e i m-speci ic
in o ma ion. This s udy aims o explo e he associa ion be ween ARR (a subs i u e o he cos o
i m-speci ic in o ma ion p ocessing) and Synch onici y. We use Synch onici y as a p oxy o
measu ing he u iliza ion o in o ma ion (Bai e al., 2019). Leha y e al. (2011) es ablish ha he
eadabili y o inancial disclosu es can se e as a measu e o he cos incu ed by s akeholde s o
in e p e , p ocess and comp ehend he ex ual con en . Tha means he lesse he eadabili y, he
highe will be he di icul ies o he s akeholde s o p ocess and unde s and he disclosu es;
because i equi es he use s o pay mo e a en ion, e o , and ime in ex ac ing and comp e-
hending he mos ele an in o ma ion (R. J. Bloom ield, 2002). When in o ma ion ga he ing o
p ocessing cos is high (lesse eadabili y), he unin o med in es o s use he s ock p ice mo e-
men s as an in o ma ion sou ce and make decisions. Following Li (2008) and Fa ooq & Ahmed
(2014), we hope ha imp o ing he ARR will inc ease in o ma ion anspa ency and ul ima ely lead
o highe Synch onici y.
Wi h his p emise, ou i s hypo hesis is s a ed as ollows;
H1: Companies wi h high ARR ha e highe Synch onici y.
I is o be no ed ha he hypo hesis de eloped he e is in con as wi h he indings o (Bai e al.,
2019) as o an eme ging ma ke like India which is semi-s ong o m is in o ma ionally e icien
and a sample consis ing o highe sophis ica ed in es o s. G ossman and S igli z (1980) opined
ha he cos o analysing da a mus equa e he e u n o analyse da a in an e icien ma ke , he
lack o which shall subop imal le el o in es o s analysing da a and esul ing in mean e e sion o
he e u ns. Fu he , Boubake e al., (2019) no ed a nega i e ela ionship be ween ARR and s ock
liquidi y, meaning ha complex ARR makes hose i m’s s ock una ac i e and a e less aded.
The e o e, as ARR inc eases, in o ma ion asymme y dec eases, he in o ma ion en i onmen
becomes mo e anspa en and inclusi e as in es o s a e able o ead & unde s and wi h less
ime and be e comp ehension. This also educes he in o ma ion p ocessing cos s and hey also
become e y liquid. As a esul , his in o ma ion symme y ge s e lec ed in s ock p ices leading o
be e Synch onici y.
The deg ee o which s ock p ices accu a ely e lec in o ma ion o he e iciency o he p ice sys em
is con ingen on he p opo ion o knowledgeable in es o s in he ma ke . When he p opo ion o
sophis ica ed in es o s is high, he p ice sys em mo e e icien ly ansmi s publicly a ailable
in o ma ion om in o med in es o s o unin o med in es o s (G ossman & S igli z, 1980). N ow-
Gyam i e al. (2015) ind ha close moni o ing by ins i u ional in es o s helps in educing in o ma-
ion asymme y and imp o es he in o ma ion en i onmen . Hence he second hypo hesis is s a ed
as ollows;
H2: The posi i e associa ion be ween ARR and Synch onici y is mo e p onounced o i ms wi h
g ea e le els o ins i u ional in es men s.
The p esence o a g ea e p opo ion o knowledgeable in es o s in he ma ke enhances he
in o ma ion en i onmen and hus, educes in o ma ion asymme y. This suppo s he indings o
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N ow-Gyam i e al. (2015) ha an inc ease in ins i u ional in es men educes in o ma ion asym-
me y, we also hypo hesise ha ;
H3: The posi i e associa ion be ween ARR and Synch onici y is mo e p onounced o i ms wi h
educed in o ma ion asymme y.
Analys s a e he in o ma ion in e media ies who do independen e alua ions and assessmen s
abou i m pe o mance, and hey go beyond he in o ma ion gi en in he company disclosu es o
upg ade hei ecommenda ions. Analys s collec , analyse, in e p e and dissemina e p i a e and
public in o ma ion o he s akeholde s (Fa ooq & Ahmed, 2014; Michaely & Womack, 1999) . As
a esul , he exis ence o analys s diminishes in o ma ion asymme y by p o iding aluable in o -
ma ion o capi al ma ke pa icipan s. Analys s imp o e he in o ma ion en i onmen and make
s ock p ices mo e in o ma i e, hus esul ing in an inc ease in Synch onici y (Chan & Hameed,
2006; Fa ooq & Ahmed, 2014). Fu he mo e, as he e iciency o s ock p ices imp o es, s ock p ice
ola ili y dec eases, and Synch onici y is enhanced (Aye s e al., 2003). This leads o ou nex
hypo hesis ha ;
H4: The posi i e associa ion be ween ARR and Synch onici y is mo e p onounced o i ms wi h high
analys ollowing.
This pape aims o ex end he li e a u e using he sample om an eme ging ma ke , i.e., India, by
ocusing on he ela ionship be ween ARR and Synch onici y. Mo eo e , his pape also checks
wha happens o he ela ionship be ween ARR and Synch onici y unde di e en ma ke condi-
ions. To do his, he sample is di ided in o subg oups based on ins i u ional in es men (as p oxied
by he p opo ion o ins i u ional in es men ), in o ma ion asymme y (as p oxied by bid-ask
sp ead), and analys co e age (measu ed by he o al numbe o analys s issuing ecommenda-
ions). I his pape inds a ela ionship be ween ARR and Synch onici y, we can conclude ha
di ec ly o indi ec ly, ARR is ac o ed in o he ma ke .
The esul s o he pape a e belie ed o help in es o s and manage s o unde s and how i al
disclosu e eadabili y is o ensu e Synch onici y and he eby ma ke e iciency. In an e icien
ma ke condi ion, s ock p ices become mo e in o ma i e. The indings also indica e ha he
managemen should be mo e cau ious abou he disclosu e eadabili y i hei i ms ha e lowe
ins i u ional in es men s, highe in o ma ion asymme y and lowe analys ollowing.
3. Da a
This sec ion documen s he de ails o he sample, he calcula ion o Synch onici y and he
calcula ion o a ious p oxies o measu ing he eadabili y.
3.1. Sample
To in es iga e he ela ionship be ween ARR and Synch onici y, we conside annual epo s o
Indian i ms (NSE 500 i ms) o he pe iod 2015–16 o 2019–20. NSE 500 is India’s i s b oad
ma ke index, and he companies included in he lis a e he op 500 i ms selec ed acco ding o
he ma ke capi alisa ion om he eligible uni e se. I has ep esen a ion om all indus ies. Since
he ca ego isa ion is based on ma ke capi alisa ion, hey a e he ac i ely aded o moni o ed
s ocks in he ma ke . Ac i ely aded companies a e mo e anspa en han hinly aded o small
i ms (Jin & Mye s, 2006). Hence in his s udy, we conside NSE 500 companies o he analysis.
Fu he , we conside he pe iod 2015–2019 because om 2016, India has con e ged in o a new
accoun ing s anda d, Ind AS. Ind AS was in oduced in a phased manne . Almos all he companies
in he sample ha e ei he olun a ily adop ed he new s anda d o come unde he i s ba ch o
manda o y adop ion. Al hough we a e no conce ned abou he e ec o Ind AS on annual epo
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Page 7 o 22
in o ma ion a ailable, ma ke pa icipan s can make mo e accu a e p edic ions abou u u e
e en s, which educes he su p ise componen o s ock e u ns and inc eases Synch onici y. By
enhancing he eadabili y o annual epo s, mo e i m-speci ic in o ma ion becomes a ailable
o he public, which e lec s he quali y o he in o ma ion en i onmen and ul ima ely leads o
highe Synch onici y.
5.6. Add essing endogenei y: Two-s age eg ession
The empi ical indings show a posi i e associa ion be ween ARR and Synch onici y. The eadabili y
o he disclosu es can be delibe a ely chosen o a ec in es o pe cep ions abou he i m
pe o mance. Managemen oppo unism heo y indica es ha managemen has incen i es while
hiding ac ual pe o mance when he i m’s pe o mance is weak (Bai e al., 2019). So ha manage-
men can use disclosu e eadabili y s a egically o ob usca e he i m pe o mance (Li, 2008).
Mo eo e , Li (2008) also inds some i m-le el cha ac e is ics like i m age, size, MTB e c., ha may
a ec ARR; some o such ac o s can also a ec Synch onici y. In o de o ensu e ha he esul s o
he main analysis a e no a ec ed by po en ial endogenei y issues ela ed o ce ain ac o s, his
pape employs a “ wo-s age eg ession” analysis echnique, as p oposed by Bai e al. (2019). This
app oach aims o p o ide a mo e obus es ima e o he ela ionship be ween ARR and
Synch onici y, by con olling o any po en ial con ounding a iables. Following Li (2008), he i s
model, Equa ion (7), is a de e minan model o eadabili y ha es ablishes he ela ionship o he
Fog index wi h i s de e minan s.
Table 4. Condi ioning e ec s o ins i u ional in es men s
Ins i u ional in es men
High Low
(1) (2)
VARIABLES Synch onici y Synch onici y
L. Fog −0.013*** −0.008
(0.005) (0.007)
L. ROA 0.007 0.011*
(0.005) (0.006)
L. Le e age −0.818 −0.460
(0.747) (0.445)
L. MTB −0.038 −0.043
(0.053) (0.037)
L. LME −1.409*** −1.634***
(0.351) (0.199)
L. Volume 0.018 −0.068
(0.062) (0.083)
Cons an 8.171*** 7.660***
(1.605) (0.999)
Obse a ions 560 589
Numbe o CO_ID 163 165
R-squa ed 0.356 0.359
Yea FE Yes Yes
Sou ce: P epa ed by au ho s
No e: Robus s anda d e o s in pa en heses ***p<0.01, **p<0.05, *p<0.1
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Fogi; =Flesch Kincaidi; ¼α0þβ1Agei; þβ2Sizei; þβ3Business segmen si;
þβ4Vola ili y o ea ningsi; þβ5Vola ili y o e u nsi; þβ6MTBi;
þβ7Audi o quali yi; þβ8Tobin0s Qi; þεi;
(7)
He e, he eadabili y o inancial disclosu es is measu ed by he Fog and Flesch Kincaid indices. The
age o he company, size, numbe o business segmen s, ola ili y o e u ns, ma ke - o-book a io,
audi o quali y, and Tobin’s Q a e con olled o in he analysis. The ola ili y o e u ns is
calcula ed as he s anda d de ia ion o he Ea nings Be o e In e es and Taxes (EBIT) o e he
pas i e yea s. The Ma ke - o-Book (MTB) a io is he a io o he ma ke alue o equi y o he
book alue o equi y. The audi o quali y is indica ed by whe he he company’s audi o is one o
he “Big 4” i ms, and Tobin’s Q is a measu e o i m pe o mance calcula ed as he a io o he sum
o he MV o equi y and BV o o al asse s minus BV o equi y di ided by o al asse s.
Then in he nex s age, he p edic ed esiduals om es ima ing Equa ion (7) o Fog and Flesch
Kincaid index espec i ely aken and enamed as “Residual Fog” and “Residual Flesch” and he e-
a e used o e-es ima e, eplacing he o iginal alues o he same in Equa ions (5) and (6).
The esul s o he es ima ion, as p esen ed in Table 7, indica e ha he e is a nega i e associa-
ion be ween he esiduals o he Fog and Flesch Kincaid indexes (which se e as p oxies o he
eadabili y o inancial disclosu es) and Synch onici y. Fu he mo e, he coe icien s on hese
esiduals a e bo h nega i e and s a is ically signi ican a he 5% le el. These indings sugges
ha e en when con olling o po en ial endogenei y issues, he ela ionship be ween he ead-
abili y o inancial disclosu es and Synch onici y emains consis en .
Table 5. Condi ioning e ec s o in o ma ion asymme y
In o ma ion asymme y
High Low
(1) (2)
VARIABLES Synch onici y Synch onici y
L. Fog 0.002 −0.018**
(0.005) (0.007)
L. ROA 0.011 0.010**
(0.009) (0.004)
L. Le e age −0.223 −0.289
(0.750) (0.323)
L. MTB −0.016 −0.105*
(0.032) (0.057)
L. LME −2.141*** −1.101***
(0.310) (0.317)
L. Volume 0.133 0.042
(0.075) (0.083)
Cons an 9.136*** 6.598***
(1.626) (1.631)
Obse a ions 547 529
Numbe o CO_ID 153 154
R-squa ed 0.399 0.267
Yea FE Yes Yes
Sou ce: P epa ed by au ho s
No e: Robus s anda d e o s in pa en heses ***p<0.01, **p<0.05, *p<0.1
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6. Conclusion
Financial decision-make s ace di icul ies in aking inancial decisions due o he ac o s like a less
anspa en in o ma ion en i onmen , highe in o ma ion asymme y e c. Mo eo e , he manage-
men some imes in en ionally makes he inancial disclosu es less eadable o hide nega i e
in o ma ion om he s akeholde s. The in o ma ion p ocessing cos inc eases as he eadabili y
educe. The e o e, in his pape , we a e in e es ed in examining he ela ionship be ween ARR and
Synch onici y in he Indian con ex o he pe iod 2015–16 o 2019–20.
In con as o Bai e al. (2019), his pape inds a posi i e ela ionship be ween ARR and u u e
Synch onici y (suppo s Hypo hesis 1). As he annual epo becomes mo e eadable, he in o ma-
ion en i onmen becomes mo e anspa en , and in o ma ion asymme y educes, he amoun o
publicly a ailable in o ma ion inc eases; as a esul , Synch onici y also inc eases. On he o he
hand, when he annual epo s a e less eadable, only sophis ica ed in es o s will be able o
unde s and and e lec he in o ma ion in he s ock p ices. A he same ime, he unin o med
in es o s will be aking he decision based on he publicly a ailable in o ma ion; hence
Synch onici y educes. As Li (2008) inds, annual epo s published wi h less eadabili y help he
managemen o delay ad e se in o ma ion in o s ock p ices.
Acco ding o he li e a u e, bo h in o ma ion anspa ency (Fa ooq & Ahmed, 2014) and opa-
queness (Jin & Mye s, 2006) can cause Synch onici y. When he disclosu es a e opaque, none o
he s akeholde s can bene i om i m-speci ic in o ma ion because such in o ma ion is no
a ailable; hence he s akeholde s use s ock p ice luc ua ions as an in o ma ion sou ce and
Synch onici y dec eases. When he i ms a e mo e anspa en , all he s akeholde s use he
Table 6. Condi ioning e ec s o analys ollowing
Analys ollowing
High Low
(1) (2)
VARIABLES Synch onici y Synch onici y
L. Fog −0.010* −0.009
(0.005) (0.007)
L. ROA 0.004 0.002
(0.010) (0.005)
L. Le e age −0.454 −0.517
(0.714) (0.575)
L. MTB −0.078* 0.008
(0.040) (0.021)
L. LME −1.336*** −1.672***
(0.256) (0.322)
L. Volume −0.030 0.085
(0.077) (0.060)
Cons an 7.923*** 7.183***
(1.246) (1.463)
Obse a ions 695 584
Numbe o CO_ID 198 166
R-squa ed 0.368 0.320
Yea FE Yes Yes
Sou ce: P epa ed by au ho s
No e: Robus s anda d e o s in pa en heses ***p<0.01, **p<0.05, *p<0.1
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a ailable in o ma ion, so Synch onici y inc eases. The median Fog index o he sample is 34.6,
which deno es ha he sample i ms a e no highly anspa en o opaque in public disclosu es. On
a e age, he i m in he sample publishes eadable annual epo s. Hence, we canno conclude
ha he opaque na u e o he disclosu e p ac ices is he only eason o high Synch onici y.
Table 7. Two-s age eg ession analysis
1
s
S age Reg ession 2
nd
S age Reg ession
(1) (2) (3) (4)
VARIABLES Fog Flesch Kincaid Synch onici y Synch onici y
Residual Fog −0.011**
(0.005)
Residual Flesch −0.004**
(0.002)
Age 0.234 0.538
(0.181) (0.736)
Business Segmen s - -
Size 1.590** 1.937*
(0.639) (1.113)
Audi o Quali y - -
MTB 1.018*** 1.628***
(0.128) (0.241)
Vola ili y o
ea nings
0.000 0.000
(0.000) (0.000)
Vola ili y o e u ns 0.234 1.060
(0.292) (1.092)
Tobin’s Q −1.398*** −2.180***
(0.114) (0.214)
L. ROA 0.017** 0.014*
(0.007) (0.007)
L. Le e age −0.055 −0.214
(0.405) (0.481)
L. MTB −0.058 −0.015
(0.040) (0.033)
L. LME −2.059*** −2.207***
(0.349) (0.366)
L. Volume 0.018 −0.033
(0.090) (0.084)
Cons an 8.376 30.968 9.968*** 11.000***
(10.704) (35.312) (1.414) (1.473)
Obse a ions 1,045 944 841 756
Numbe o CO_ID 242 224 240 223
R-squa ed 0.097 0.449 0.317 0.306
Yea FE Yes Yes Yes Yes
Sou ce: P epa ed by au ho s
No e: Robus s anda d e o s in pa en heses ***p<0.01, **p<0.05, *p<0.1
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Fu he , we ind ha in he Indian con ex , he p opo ion o sophis ica ed in es o s (like
ins i u ional in es o s) is high. To check whe he he ela ionship be ween ARR and Synch onici y
changes wi h he changes in ins i u ional in es men , in o ma ion asymme y, and analys ollow-
ing, we classi ied he sample in o wo subg oups based on he median ins i u ional in es men ,
in o ma ion asymme y, and analys ollowing. The indings indica e ha he posi i e ela ionship
be ween ARR and u u e Synch onici y is mo e p onounced o he i ms wi h highe ins i u ional
in es men (suppo s Hypo hesis 2), lowe in o ma ion asymme y (suppo s Hypo hesis 3), and
highe analys ollowing (suppo s Hypo hesis 4). The esul s a e obus when we add ess he
po en ial endogenei y issue suspec ed on eadabili y. The eby we p o e ha he inc eased
Synch onici y in he sample is due o he imp o ed in o ma ion anspa ency in he ma ke .
When he ARR is highe , bo h he in o med and unin o med in es o s in he ma ke make use o
he in o ma ion, and as a esul , all he a ailable in o ma ion easily ge s inco po a ed in o he
s ock p ices and hence Synch onici y inc eases. Since he p opo ion o sophis ica ed in es o s is
highe in he Indian capi al ma ke when he annual epo s a e less eadable, only he sophis i-
ca ed in es o s in he ma ke can inco po a e such in o ma ion in he s ock p ices, and as a esul ,
Synch onici y dec eases.
The esul s o he pape help in unde s anding how he in o ma i eness o he annual epo s
(measu ed ia he ARR) a ec s Synch onici y in an eme ging ma ke like India. Fu he , he
indings also indica e how eadabili y con ibu es o a be e in o ma ion en i onmen . To
a g ea ex en , he in o ma i eness o he annual epo s helps educe he su p ise componen
in he u u e. The highe he ARR, he be e he in o ma ion anspa ency, he lowe he in o ma-
ion asymme y, he be e he in o ma ion en i onmen , which esul s in highe Synch onici y. We
also ind ha he esul s may change acco ding o he a ia ion in he p opo ion o ins i u ional
in es men , analys ollowing and in o ma ion asymme y in he capi al ma ke . The indings o
he pape will be help ul o he in es o s and he managemen o unde s and how i al disclosu e
eadabili y is o achie e be e ma ke e iciency. Be e Synch onici y indica es mo e e icien
ma ke condi ions and in o ma ionally e icien p ice mo emen s. Hence unde an e icien ma ke
condi ion, in es o s can use p ice luc ua ions as an in o ma ion sou ce o make decisions. The
indings also indica e ha he managemen should be mo e cau ious abou he disclosu e ead-
abili y i hei i ms ha e lowe ins i u ional in es men s, highe in o ma ion asymme y and lowe
analys ollowing.
Funding
The au ho s ecei ed no di ec unding o his esea ch.
Au ho de ails
Vismaya Gangadha an
1
E-mail: [email p o ec ed]
Lakshmi Padmakuma i
1
1
Finance and Accoun ing a ea, IFMR GSB, K ea Uni e si y,
S ici y, India.
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho (s).
Ci a ion in o ma ion
Ci e his a icle as: Annual epo eadabili y and s ock
e u n synch onici y: E idence om India
1
, Vismaya
Gangadha an & Lakshmi Padmakuma i, Cogen
Economics & Finance (2023), 11: 2186034.
No es
1. The pape has been p esen ed a he Resea ch
Symposium on Finance and Economics 2022, K ea
Uni e si y, India, and he Wo ld Finance Con e ence
2022, Uni e si y o Tu in, I aly. The commen s and
sugges ions o he discussan s and pa icipan s a e
inco po a ed in o he d a .
2. h ps://co po a e inanceins i u e.com/ esou ces/knowl
edge/o he / og-index/
3. Bid-ask sp ead da a downloaded om Bloombe g (i is
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Appendix I
In o ma ion asymme y, ins i u ional in es men , analys co e age and Synch onici y
This sec ion shows he ela ionship o in o ma ion asymme y, ins i u ional in es men , analys
ollowing wi h Synch onici y. Table A1 shows a posi i e and signi ican ela ionship be ween
ins i u ional in es men , analys ollowing and Synch onici y, which con i ms he esul s o exis ing
li e a u e (Fa ooq & Ahmed, ; N ow-Gyam i e al., 2015). The di ec ion o he ela ionship be ween
in o ma ion asymme y and Synch onici y is nega i e bu no s a is ically signi ican .
Table A1. In o ma ion asymme y, ins i u ional in es men , analys co e age and s ock e u n
Synch onici y
(1)
VARIABLES Synch onici y
L. Fog −0.007*
(0.004)
L. Asymme y −0.001
(0.005)
L. Ins i u ional in es men 0.005**
(0.002)
L. Analys ollowing 0.462**
(0.209)
L. ROA 0.010*
(0.005)
L. Le e age −0.357
(0.518)
L. MTB −0.037
(0.038)
L. LME −1.981***
(0.303)
L. Volume 0.029
(0.073)
Cons an 9.162***
(1.134)
Obse a ions 1,189
R-squa ed 0.320
Numbe o CO_ID 345
Yea FE Yes
Sou ce: P epa ed by au ho s
No e: Robus s anda d e o s in pa en heses ***p<0.01, **p<0.05, *p<0.1
Gangadha an & Padmakuma i, Cogen Economics & Finance (2023), 11: 2186034
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