Obfuscation, Textual Complexity and the Role of Regulated Narrative Accounting Disclosure in Corporate Governance

This paper examines whether poorly performingcompanies use textual complexity to obfuscatein the Operating and Financial Review (OFR) andthus undermine effective communication and goodgovernance. Prior research on the ‘obfuscationhypothesis’ has reached confused andcontradictory conclusions. The OFR is a usefulobject for testing the hypothesis because itssemi-regulated status provides a measure ofcommonality of content while leaving scope forvariability in textual complexity. This studyexamines whole texts, employs a larger numberof variables and proxy measures than previousstudies, and uses regression analysis, toovercome some of the possible causes ofinconsistency in previous results. It concludesthat poorly performing companies do notobfuscate by the use of textual complexity.OFRs are nonetheless textually complex and byno means all this complexity can be attributedto the complexity of the underlying activitiesto be described. The consequences of thisfinding for regulators and researchers arebriefly examined. The weakness of the evidencefor the hypothesised obfuscation by textualcomplexity shifts attention to other forms ofobfuscation and some suggestions for futureresearch are made.