Concerns have been raised by regulators and investors about the increasingly complex financial reports that are becoming incomprehensible to ordinary investors. The readability literature attributes unreadable financial reports to the reporting firms' operational complexity and/or the desire to obfuscate poor performance. At the same time, upper echelons theory from the management literature posits that top managers' characteristics will impact the way the firm is managed, while business and social science research posits that individuals become more capable and ethical as they grow older. We expect older CEOs and executives to be more capable of explaining operating complexities and staying ethical in reporting, thus leading to more readable financial reports. Our results support this view.
Financial reports are expected to convey information to outsiders who are not privy to inside information of the firm. Therefore, clarity of financial reports becomes important in order to ensure that the general investing public is able to understand the information in such reports and thus use them to make informed decisions about the firm. In fact, ‘understandability’ is one of the qualitative characteristics of financial reports highlighted in FASB's conceptual framework for financial reporting (FASB, 2010). The readability of annual reports is an issue of concern for regulators and investors. Christopher Cox, the then chair of the SEC states that investors are turning away from reading annual reports due to increasing verbosity and jargon. More worryingly, he states that increased verbosity may be used to hide fraud (SEC, 2007). These sentiments are echoed by Warren Buffet as well (SEC, 2007). Confirming these concerns, research has shown that poor readability scores are associated with fraud (Blanco & Dhole, 2017), poor performance (Li, 2008), and earnings management (Lo, Ramos, & Rogo, 2017). Therefore, factors that improve the readability of financial reports would be of interest to regulators and investors. The upper echelons theory posits that the top management team (hereinafter the TMT) significantly impacts the strategy, direction, and operations of the firm (Hambrick & Mason, 1984). Wiersema and Bantel (1992) argue that TMT characteristics and demographics can predict the functioning of the TMT. This paper investigates the impact of executive age on the readability of annual financial reports. Humans mature as they grow older. This maturity will impact the business acumen, communication skills, and the ethical sensitivities of people. Research has shown that as people grow older and become more experienced, their decision-making skills improve (Huang, Rose-Green, & Lee, 2012; Li, Mayhew, & Kourtzi, 2009; Liden, Stilwell, & Ferris, 1996). Furthermore, older executives have better communication skills due to experience. Older individuals write better because they are more likely to activate both hemispheres of the brain in writing (Gray-Grant, 2013). Finally, research also shows older people exhibit greater ethical sensitivities compared to younger people (Borkowski & Ugras, 1998; Mudrack, 1989; Peterson, Rhoads, & Vaught, 2001; Sundaram & Yermack, 2007; Wimalasiri, 2001). These arguments have been used by Huang et al. (2012) to show that a firm's earnings quality improves with CEO age