The TONE of Financial Reporting (TONE) and readability of Financial Reporting (FR) are of substantial importance to shareholders and investors. Financial statements that are prepared in a simpler and more transparent manner can reduce information asymmetry between managers and shareholders. Moreover, greater transparency in financial disclosures can signal to capital market participants that a firm’s financial condition is satisfactory. Prior research indicates that firms experiencing poor financial performance tend to present information in a more complex and ambiguous manner in order to obscure unfavorable conditions. The increasing volume and complexity of narrative disclosures in recent years, including explanatory notes and board of directors’ reports, while providing opportunities to disclose detailed information about corporate performance and future prospects and thereby enhance decision usefulness, has also created greater scope for managers to engage in impression management [1]. Merkl Davies and Brennan [2], through an examination of selected sections of Enron’s annual reports shortly before its bankruptcy, identified expressions that reflected a positively biased portrayal of the company’s condition. Their findings suggest the presence of opportunistic managerial behavior aimed at distorting users’ perceptions of corporate performance rather than providing useful supplementary information. Deloitte, the professional services and auditing firm, also observed that Enron’s reports became increasingly ambiguous and complex as the firm’s financial condition deteriorated. These findings indicate that Enron engaged in impression management through the TONE of FR under circumstances in which accounting numbers conveyed a different reality [3]. The TONE of managerial narrative disclosures refers to the degree of positivity or negativity expressed in the text. Iatridis [4] finds that firms with higher earnings use more pessimistic language compared to firms with lower earnings, suggesting that high earning firms tend to exhibit greater conservatism. To assess the effects of reporting TONE, prior studies have focused on corporate performance forecasting and stock market returns, as these areas represent two broad and highly significant domains within accounting and finance that consistently attract the attention of capital market participants [5].

The TONE of FR is typically measured by the proportion of positive and negative words used in the board of directors’ annual reports and can be interpreted from either an informational or an opportunistic perspective. From the informational perspective, reporting TONE reduces information asymmetry, whereas from the opportunistic perspective, TONE is employed as a tool of impression management to manipulate or distort users’ perceptions. Corporate Governance (CG) functions as a mechanism to mitigate managerial opportunism. Prior studies such as Li [6], Ajina et al. [7], and Hassan [8] indicate that managers adopt specific linguistic styles in FR. When managers aim to present strong performance, they tend to issue more readable financial reports. In contrast, managers seeking to conceal poor performance often provide vague and obscure disclosures in annual reports. Theoretical and empirical literature suggests that when managers intend to engage in financial statement fraud, they issue more complex and less readable reports in order to conceal opportunistic behavior and reduce the likelihood of detection by investors, financial analysts, and regulatory bodies. For example, Jones [9], Goel et al. [10], and Skillicorn and Purda [11] argue that managers use difficult and obscure language in financial reports to facilitate fraudulent activities. Accordingly, analyzing linguistic patterns in FR is expected to play a critical role in detecting accounting fraud, while CG monitoring mechanisms may prevent such behavior. Nevertheless, this issue has received limited attention in domestic studies, resulting in a notable gap in the accounting and FR literature [12]. From one perspective, CG is confined to the relationship between the firm and its shareholders. This traditional view is rooted in agency theory and emphasizes the capacity of a country’s legal system to protect minority shareholders’ rights. From another perspective, CG is viewed as a network of relationships not only between the firm and its owners but also between the firm and a broad range of stakeholders, including employees, customers, suppliers, and debt holders. This perspective is commonly associated with stakeholder theory. A review of CG definitions in academic literature reveals a shared emphasis on accountability and oversight of FR quality. This broader view stresses accountability not only to shareholders but also to other stakeholders. An effective CG system encourages efficient resource utilization and enforces corporate accountability toward stakeholders. Furthermore, the implementation of CG mechanisms can lead to improved resource allocation, enhanced information transparency, and ultimately improved TONE and readability of FR [13]. Despite its importance, this issue has largely been overlooked in domestic empirical research, creating a gap in the accounting and FR literature that motivates the present study. Accordingly, this research seeks to address the following question: Do CG mechanisms have a statistically significant effect on the TONE and readability of corporate FR?

A growing body of research underscores the critical role of Financial Reporting Readability (FRR) and TONE as determinants of reporting quality, market consequences, and audit outcomes. The consensus emerging from recent studies highlights that less readable reports are often associated with higher risks and adverse economic effects. Blanco and Deol [14] established a direct link between reporting clarity and integrity, finding that lower readability and comparability of financial statements significantly increase the likelihood of fraudulent reporting in U.S. markets. This finding aligns with the notion that opacity can obscure malfeasance. Further exploring the performance dimension, Li [6] demonstrated that firms with lower earnings tend to produce more complex reports, while those with higher readability exhibit greater earnings persistence, suggesting that clear reporting may reflect and reinforce sustainable performance .The economic implications of readability extend to cost of capital. Bonsall and Miller [15] provided evidence from the U.K. that enhanced FRR leads to a reduction in a firm's cost of debt, indicating that creditors perceive transparent reporting as a risk-mitigating factor. Beyond readability, the TONE of reporting also carries significant weight. Henseler et al. [16] found that executive compensation structures can negatively influence both the TONE and readability of reports, with managers adopting a more negative TONE in pursuit of higher rewards, thereby linking managerial incentives to reporting quality .The interplay between TONE and reporting aggressiveness has been examined in emerging markets. Mirzaei et al. [17] demonstrated that a pessimistic TONE in FR significantly curbs aggressive FR in Iranian firms. Notably, they also found that strong shareholder rights protection intensifies this moderating effect, highlighting the role of CG. Finally, the audit risk implications are substantial. Kazemi Olum et al. [18] showed that low FRR in Tehran-listed companies is associated with a suite of higher audit risks: longer audit report delays, higher audit fees, a greater propensity for going-concern opinions, and more frequent auditor changes. This body of work collectively confirms that poor readability increases information processing costs and perceived risk for auditors and other stakeholders.

The regression models used to test the research hypotheses are specified as follows.

Model 1: TONE model

TONEi, t = α0 + β1manage − owni, t + β2Insi, t + β3Family − owni, t + β4b − sizei, t

+ β5OUTDi, t + β6Genderi, t + β7Ind − Committeei, t + β8Size (1)

− Committeei, t + β9Meetings − Committeei, t + εi, t Model 2: FRR model

READABILITYi, t = α0 + β1manage − owni, t + β2Insi, t + β3Family − owni, t + β4b − sizei, t + β5OUTDi, t + β6Genderi, t + β7Ind − Committeei, t + β8Size − Committeei, t + β9Meetings − Committeei, t + εi, t

The results of this study indicate that different CG components have varying and significant effects on the TONE and readability of financial reporting. The analysis shows that managerial and FO negatively and significantly affect both the TONE and readability of financial reports. Managers, driven by the desire to present positive performance to shareholders, may provide overly optimistic reports and sometimes fail to fully adhere to the principle of information alignment. Similarly, family owners, due to lower monitoring sensitivity and confidence in their control over company shares, supervise financial reporting less rigorously, leading to increased complexity and reduced readability of reports. These findings suggest that the type and motivation of ownership can directly influence the quality of a company’s financial communication with the capital market. In contrast, IO has a direct and significant positive impact on the TONE. Institutional owners, by employing skilled managers and closely monitoring the reporting behavior of company executives, are better able to enhance report quality. However, IO does not have a significant effect on the readability of financial reports, likely because these owners prioritize accuracy and compliance with standards over simplifying and clarifying the presentation of information. BI and ACI also exert direct and significant effects on both the TONE and readability of financial reporting. Independent members, through unbiased and professional oversight, can prevent manipulation or opportunistic reporting while ensuring that the presentation of information remains clear and understandable. These results emphasize that the independence and expertise of internal oversight bodies play a critical role in improving financial reporting quality, and that factors such as BS, committee size, gender diversity, or the number of meetings alone, without sufficient oversight quality and professional competence, cannot guarantee improvements in TONE or readability. Nonetheless, the Frequency of Audit Committee Meetings (FACM) has a direct positive impact on readability, as regular reviews reduce complexity and enhance the transparency and comprehensibility of financial information. Overall, the study demonstrates that enhancing financial reporting quality is not merely a function of committee structures or ownership composition, but depends heavily on the implementation of effective oversight, the independence of monitoring members, and the interactions among owners, managers, and audit committees. In other words, achieving an improved TONE and readability in financial reporting requires a combination of governance effectiveness, professional monitoring, and adherence to transparency standards, rather than simply focusing on quantitative aspects of board or committee composition. This study also has several limitations that should be considered when interpreting the results. First, the sample is limited to TSE-listed companies, which may restrict the generalizability of the findings to unlisted firms or other sectors. Second, the data cover a specific period, and subsequent economic, political, or regulatory changes may have different impacts on TONE and readability. Third, certain qualitative aspects of reporting quality, such as the content of explanatory notes or organizational culture factors, were not examined due to data limitations. Finally, this study relies on historical and quantitative data, and therefore behavioral aspects of managers and shareholders that may influence reporting practices were not directly measured. Despite these limitations, the findings provide important implications for managers, investors, and regulatory bodies, highlighting that a combination of independence, professional expertise, and effective CG mechanisms is crucial for enhancing the TONE and readability of financial reporting, ultimately strengthening market confidence and supporting more informed investment decisions.

The authors would like to thank their colleagues and academic institutions for their support and valuable contributions to the development of this research.

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

The dataset used in this study was simulated for the purpose of demonstrating and evaluating the proposed framework. The data and/or computational details are available from the corresponding author upon reasonable request