Effect of earnings quality on the financial reporting readability using the structural equation approach

Companies' annual financial reports have been a major source of information for decision-making by capital market participants, market legislators, and other stakeholders. Also, the information contained in the financial statements which have high readability has a higher value. Managers use corporate disclosures to mislead or influence investors about corporate value. Earning quality is an important feature of the accounting system. The high quality of reported earnings through information transparency and market efficiency causes the highest accounting income and economic income alignment and indicates the usefulness of earning information for users in making decisions. Poor earning quality creates risk in resource allocation, slows economic growth through misallocation of capital, diverts resources to unprofitable projects, and increases information risk. The present study investigates the effect of earnings quality on the readability of financial reporting using the structural equation approach in companies listed on the Tehran Stock Exchange. The statistical population of the study is the companies listed on the Tehran Stock Exchange during the period 2006 to 2020 and the relationship is studied in 435 firm-years observation. Research findings indicate that earnings quality affects the readability of financial reporting.