It is widely accepted that corporate annual reports are prepared primarily for external users and that such reports should be designed, in form and content, according to the needs of the external users (Pijper, 1993). Users should therefore be contacted frequently to assess their perceptions about various aspects of the reporting practices of public companies since their views will provide the main feedback to improve the communication function of corporate reports (Epstein & Pava, 1993).
One of the pioneering studies to have attempted to discover the information needs and sources of such information was undertaken in the United States by Baker and Haslem (1973). The authors found that the majority of the individual investors rely heavily on stockbroker’s advice as their main source of information about companies. Financial statements,
however, were found to be a source of information by only a minority of individual investors. Regarding other information items that are expected to be disclosed by companies, Baker and Haslem (1973) highlight that individual investors attach a great deal of importance to the information about the future expectations of the company. At the same time, individual investors attached a much lower degree of importance to information regarding dividends.
In the United Kingdom, Lee and Tweedie (1975) found the chairman’s report to be the most widely read followed by the profit and loss account.
This was attributed to the simplicity of the chairman’s report, which elucidates the more technical information contained in other parts of the report.Bartlett and Chandler (1997)re-examined the private shareholders’
usage of annual corporate reports and justified their study by the fact ‘‘that much has changed within the financial reporting environment’’ since theLee and Tweedie (1975) study (Bartlett & Chandler, 1997). The authors found that the most widely read section of the annual corporate report is the chairman’s statement, a result similar to that found by Lee and Tweedie some 20 years ago. Interestingly, the auditor’s report was read the least by individual shareholders. There was also a noticeable decline found in the shareholders’ interest in the profit and loss account and balance sheet since the Lee and Tweedie (1975) study. An expected result of the Bartlett and Chandler’s (1997) study is the association between the rate of usage and degree of importance that individual shareholders place on each section of the annual report. Bartlett and Chandler also disclose that the majority of respondents in their sample desired less information in the form of a summary report rather than the annual report itself.
Anderson (1981)focused on institutional investors in Australia and found that Australian investors relied mostly on the annual report when making their investment decisions followed by visits to the companies. Regarding the annual corporate report itself, the most readable sections of the annual report were perceived to be the balance sheet, profit and loss account, notes to the accounts, and the chairman’s statement, respectively. The profit and loss account, however, was perceived to be more important than the balance sheet. However, the author failed to perform any statistical test to determine whether there is a significant difference between the users’ usage of the annual report sections on the one hand and the perceived importance of such sections on the other hand. Anderson (1981) also documents the external users’ desire for additional information to be provided in the annual corporate report such as information about the company’s product, current value of long-term assets, and remuneration of directors.
Epstein and Pava (1993)examined the perceptions of US investors about various aspects of annual corporate reports. One of the main objectives of their study was to measure the change in the shareholders’ perceptions about annual corporate reports over two decades. The authors did this by comparing the result of their study with the earlier results of the Epstein (1975) study, which used the same methodological approach to measure individual investors’ perceptions about the quality of annual corporate reports. Epstein and Pava (1993) found that individual investors signifi- cantly rely on the annual reports more than they did some 20 years ago and rely significantly less on the advice of stockbrokers. Regarding the different sections of the annual report, the authors reveal that American individual investors read and use the income statement and balance sheet more than other parts of the annual report. Finally,Epstein and Pava (1993)document the individual investors’ demand for more financial disclosure in the annual reports. For example, they demand disclosure of any pending litigation, unasserted claims, budgeted income for the coming year, and restating statements using current values. They also demand more non-financial information, such as independent evaluation of management’s effectiveness, reasons for the change of auditor, and statement of audit committee responsibility.
Anderson and Epstein (1995)extended their research by providing a useful investigation on Australia. The authors highlight the directors’ report to be the most thoroughly read followed by the income statement. Nevertheless, their respondents did perceive the income statement to be more useful than the directors’ report in making an investment decision. However,Anderson and Epstein (1995)do not make an attempt to statistically determine whether the difference between the pattern of readership of the annual reports’
sections and the perceived usefulness of such sections is of any significance in the Australian environment. Respondents had also expressed a desire for the simplification and more explanation of the balance sheet, statement of cash flow, and the income statement. Finally, the authors highlight the Australian investors’ demand for additional disclosure in the annual reports; such as pending litigation, unasserted claims, management audit, and information on change of auditors.
In the context of Saudi Arabia, several researchers have provided a valuable insight into the individual investors’ usage of the annual corporate reports (see e.g.,Abdelsalam, 1990;Al-Mubarak, 1997;Ba-owaidan, 1994).
They all confirm that the annual corporate report is the primary source of corporate information and their findings are in line with those found in developed countries. However, differences were detected in terms of the
other information provided in the annual corporate report. For instance, Abdelsalam (1990) reports that the vast majority of respondents in his survey indicated that they read the annual reports and that the profit and loss account was the most important part of the annual report. Focusing on what is important to Saudi investors,Abdelsalam (1990)highlights that it is information about the future of the company as well as information about directors that was perceived to be important.Ba-owaidan (1994)also found the profit and loss account to be the most influential part of the annual report followed by the balance sheet. Ba-owaidan (1994) reports that the vast majority of respondents in his study encountered some difficulty in understanding the content of the annual reports.
In another Middle Eastern environment, Jordan, Abu-Nassar and Rutherford (1996)undertook a study to discover the view of external users of annual corporate reports. The authors targeted different groups of external users, namely individual shareholders, institutional shareholders, bank loan officers, stockbrokers, and academics. In terms of the usage of the annual report,Abu-Nassar and Rutherford (1996)found bank loan officers to be the heaviest users of the annual reports in Jordan while individual shareholders and academics were found to be the least. They also found the income statement and balance sheet to be the most widely read parts of the annual corporate report by all the users. The authors documented the low degree of users’ satisfaction about many qualitative characteristics of corporate reports in Jordan. In terms of the importance of the various sources of corporate information,Abu-Nassar and Rutherford (1996)argue the annual corporate report to be the most important source of information for all user groups. The only exception being the bank loan officers who indicated that the most important source of information to them was to personally visit companies followed by an independent examination of the annual report itself.2
RESEARCH METHODOLOGY
Study Hypotheses The aim of this research is twofold.
1. To empirically examine the perceptions of the main users of annual corporate reports to ascertain whether they have similar or different
views on the level of importance of the various sections of the annual corporate report in Saudi Arabia.
2. To evaluate issues that may concern the users of annual corporate reports in terms of the style of language with which such reports are written.
Depending on which group the user belongs to, the style of language may have a material effect on both the readership and the understandability of the information contained in the different sections of the report.
To facilitate our analysis, the following hypotheses were developed and are stated in their null form:
H1. The different external user groups of annual corporate reports in Saudi Arabia hold similar views on the importance of the various parts of the annual corporate report to their decision-making process.
H2. The different external user groups of annual corporate reports hold similar views on the level of technicality of the language with which the different sections of the annual reports are currently written in Saudi Arabia.
Data Collection
To test the hypotheses, a questionnaire was designed to fulfill the research objective. An extensive review of the literature was undertaken (e.g.,Babbie, 1998; Bartlett & Chandler, 1997; Abu-Nassar & Rutherford, 1996;
Ibrahim & Kim, 1994;Epstein & Pava, 1993; Oppenheim, 1992; Chow &
Wong-Boren, 1987) to ensure that no important point was omitted.
Drawing on the literature and considering the Saudi environment, five groups of external users of annual corporate reports were identified which include (1) individual investors, (2) institutional investors, (3) creditors, (4) government officials, and (5) financial analysts.3Before distribution, the questionnaire was pre-tested during pilot interviews with 13 individuals comprising both academicians and practitioners. All of our pilot inter- viewees had either researched this area to some extent or were aware of the financial reporting practices in Saudi companies. Each was asked to respond critically on any aspect of the design of the questionnaire. Their comments proved invaluable in improving the content of the questionnaire.
AsTable 1indicates, a total of 636 questionnaires were distributed to the five groups in our sample. A total of 303 usable responses were received generating a response rate of 48%. This response rate is perceived to be
good since previous researchers (such as Al-Kassim, 1996; Al-Jabr, 1995;
Al-Rughaib, 1995) have all stated that average response rate to ques- tionnaire surveys in Saudi Arabia tends to be very low, being in the average of 30–40%. Interestingly, the 116 questionnaires that were returned by the individual investors had all stated that they at least read the annual reports.
However, 18 of these had indicated making investments according to the direction of the prices in the market or according to advice from peers and friends and were thus excluded from the sample.
We also employed the Cronbach’s alpha technique to statistically measure the internal consistency and reliability of our research instrument (see e.g., Botosan, 1997; Huck & Cormier, 1996). Cronbach’s alpha takes a value between 0 and 1 where 1 indicates perfect correlation between the parts of the instrument. While there is no test of significance for the alpha, the literature suggests 0.70 as an acceptable level with the preferable amount being 0.80 or above (Botosan, 1997; Bryman & Cramer, 1995; Huck &
Cormier, 1996). In this study, the Cronbach’s alpha was calculated for each user group as well as for the whole sample. The results for the five separate user groups shown inTable 2were all above 0.70 suggesting a relatively high
Table 1. Distribution and Collection of Questionnaires.
Group Questionnaires Response Rate (%)
Distributed Returned
Individual investors 339 116 34
Institutional investors 47 32 68
Creditors 113 52 46
Governmental officials 59 49 83
Financial analysts 78 54 69
Total 636 303 48
Table 2. Kronbach’s Alpha for Individual Groups and Entire Sample.
Group Kronbach’s Alpha
Individual investors 0.92
Institutional investors 0.72
Creditors 0.87
Governmental officials 0.90
Financial analysts 0.92
All groups 0.90
amount of internal consistency of the responses generated by each of the user groups.
Statistical Tests
We asked respondents to rate the importance of the seven possible sources of information by using a 5-point Likert-type scale where 1 is ‘not important’ and 5 is ‘very important’. Since users may perhaps perceive some information sources to be important in absolute terms, we further asked them to clarify their perceptions by ranking the different sections in terms of their priority. Thus, respondents were also asked to rank the different sections in annual corporate reports in terms of their importance to their decision-making needs by assigning a 1 to ‘the highest and most important’
source and a 7 to ‘the least in priority’.
When the question is about ranking something such as the importance of the different sections in corporate annual reports, we calculate the Kendal’s coefficient of concordance for each group of respondents and for the sample as a whole. This coefficient, known as W, quantifies the amount of agreement among the members of a group regarding their evaluation of a set of items (see e.g.,Moroney, 1967, p. 338;Siegel & Castellan, 1988, p. 262;
Huck & Cormier, 1996, p. 82). The value of the coefficient, known asW, varies fromzero, where there is no agreement among the respondents, toone where there is total consensus among the respondents.
As the number of groups in this study is five, these groups can be analysed in pairs or collectively because each group has a different number of cases.
The groups are independent of each other and their perceptions were measured on an ordinal scale. Also, since there are more than two inde- pendent groups, we used the Kruskal–Wallis one-way analysis of variance by ranks (commonly called the Kruskal–WallisHtest) to test whether the different independent samples under consideration come from the same or identical populations. The rejection of the null hypothesis (within any specifieda) means that there is a significant difference between, at least, one pair of the groups considered in the test. This test, however, cannot determine which pair, or pairs, of groups have the significant differences. To do that, a post hoc analysis needs to be performed in each pair of groups.
We also use the Mann–Whitney U test to examine whether the two independent samples under consideration come from the same or identical population. The rejection of the null hypothesis (within any specifieda) means that there is a significant difference between the groups considered in the test.