Audit report readability and information efficiency: evidence from the Tehran Stock Exchange

Abstract

<h3>Purpose</h3><p>This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market context characterized by voluntary IFRS adoption and the absence of Big 4 audit firms.</p><h3>Design/methodology/approach</h3><p>By utilizing hand-collected data from TSE-listed companies, covering 1,097 firm-year observations from 2012 to 2023, readability is assessed using three well-established indexes (Fog, Flesch–Kincaid and Simple Measure of Gobbledygook). Informational efficiency is evaluated by analyzing how stock prices align with a random walk pattern, with additional control variables including governance factors, auditor characteristics and firm-specific indicators to enhance model robustness.</p><h3>Findings</h3><p>The findings indicate a positive association between audit report readability and informational efficiency, suggesting that clearer and more readable audit reports help reduce information asymmetry. Control variables such as board independence and auditor tenure showed significant impacts, supporting the conclusion that governance and auditor-specific factors enhanced informational efficiency. Agency and institutional theories are used to contextualize these findings, especially within TSE’s unique regulatory environment. The study addresses endogeneity with firm fixed effects and sample selection bias through Heckman’s two-stage procedure. The absence of Big 4 auditors in Iran prompted controls for auditor size effects, supporting our findings across different audit market segments.</p><h3>Research limitations/implications</h3><p>Limitations include potential omitted variable bias and challenges in generalizing findings beyond the TSE. Despite applying firm fixed effects and Heckman’s two-stage procedure to control for endogeneity, some residual biases may remain.</p><h3>Practical implications</h3><p>For regulators, auditors and investors, these findings underscore the value of promoting readability in audit reports to improve informational efficiency, particularly in emerging markets with evolving regulatory standards.</p><h3>Originality/value</h3><p>By focusing on audit report readability within an emerging market lacking Big 4 presence, this study offers unique insights into how readability can foster transparency and investor confidence in regions with distinct market dynamics.</p>