Repaying the trust: Social trust and the readability of Form 10-K reports

Abstract

Purpose: This study explores the relationship between social trust and financial reporting obfuscation, defined as a lack of annual report readability. We propose that social trust is an important informal institution that promotes ethical behavior and accountability, leading corporate managers to produce clearer, more accessible annual reports for stakeholders. Design/Methodology/Approach: Using a sample of 44,799 firm-year observations from 1,076 publicly listed U.S. firms, we analyze the impact of regional social trust on the readability of financial reports. We further investigate how this relationship varies across different organizational and managerial characteristics, including stakeholder orientation, geographical dispersion, monitoring environments, managerial capabilities, and CEO experience. Findings: Our results provide strong evidence that firms located in regions with higher social trust produce less obfuscated financial reports. This negative relationship is more pronounced in firms with higher stakeholder orientation, lower geographical dispersion, stronger monitoring environments, more capable managers, and CEOs with broader work experience (generalist CEOs). Practical Implications: The findings suggest that social trust is a significant driver of financial report readability. This has important implications for external stakeholders, managers, and policymakers in understanding the role of informal institutions in corporate reporting practices. Originality/Value: This study contributes to the accounting literature by identifying social trust as a key factor influencing the clarity of financial reports and by providing insights into the underlying mechanisms through which this relationship operates