Readability of MD&A and Operating Performance of Banking Companies

The impact of firm performance on readability has become significant in understanding the qualitative aspect of financial reports. There are several studies on readability and firm performance. We therefore attempt to explore firm performance and readability of banking firms in India which is more relevant in the current situation of increased provisioning by banks. Netinterest margin (NIM) and Fog index are used as operating performance and readability variables respectively. The lower Fog index implies easy readability. We use cross sectional analysis of data to understand the effect of firm’s performance on readability and bidirectional effect readability on operating performance. We find Indian banking firms’ MD&A are difficult to read. However, when we compare with existing literature based on companies from the USA and 42 other countries, Indian banking firms’ MD&A are difficult but not unreadable. Our results show that firm’s performance influence readability. The results are statistically significant showing that firm performance would have negative impact on Fog index of readability and Fog index would have negative association with firm performance. Based on our results, we, therefore, affirm that firms with poor performance would structure their annual reports to veil adverse information, in unfavorable situations. Application of readability index in case of banking companies of emerging economy in association with operating performance is the contribution of this paper to the existing literature.