Reading between the lines of accounting narratives: Testing the obfuscation hypothesis on companies listed at the Warsaw Stock Exchange

Objective: The study explores the problem of the readability of accounting narratives and aims to test the obfuscation hypothesis (OH) in a non-English context and a non-English language. We explored the link between the tendency of managers to obscure accounting narratives to make unfavourable news more difficult for stakeholders to read and process, and the financial health of firms. Research Design & Methods: We applied descriptive statistics, correlation and regression analysis. Our sample consisted of 2 228 firm-year observations of non-financial companies headquartered in Poland, listed on the Warsaw Stock Exchange (WSE), from 2015 to 2024. We proxied the readability of accounting narratives using the FOG index applied to letters to shareholders. Findings: We provide empirical evidence indicating that the OH was valid for companies listed on the Warsaw Stock Exchange. Using the return on assets (ROA), we demonstrate that managers of less profitable firms tend to obfuscate letters to shareholders. We corroborated our findings using the Altman-alike score. The COVID-19 pandemic moderated the impact of financial health on the readability of accounting narratives. Implications & Recommendations: Our research calls for further research on the readability of accounting narratives in non-English settings and non-English languages. It shows other applications of the bankruptcy prediction models, and it demonstrates how to adopt the FOG index to a non-English language context. Contribution & Value Added: The study contributes to the literature on the readability of accounting narratives by offering a proxy for bad news in the context of the obfuscation hypothesis: the Z-score of bankruptcy prediction models, which one may also interpret as a sign of financial health. It also demonstrates how to adopt the FOG index in a non-English setting and in a non-English language.