Annual Report Complexity and Firm Profitability: The Roles of Agency Costs and Financial Risk as Moderating Variables: A Case of Egypt

The complexity of annual reports reduces the quality of the communication between companies and users. The literature has demonstrated that annual reports complexity reduces users' ability to understand, interpret, analyze information, and make decisions, resulting in higher information asymmetry, agency costs, financial risk, and lower profitability. This study examines the relationship between annual reports complexity and firm profitability. It also investigates the moderating effect of agency costs and financial risk on the relationship between annual reports complexity and firm profitability. It depends on a sample of 75 Egyptian companies listed on the EGX 100 index with 450 company-year observations during the period 2016-2021. The complexity of annual reports is measured by the LIX index; firm profitability is measured depending on EPS; agency costs are measured by the operating expense ratio; and financial risk is measured using leverage. The results indicate that annual report complexity has a significant negative impact on firm profitability, suggesting that Egyptian companies with more complex annual reports are less profitable. Furthermore, the results reveal that both agency costs and financial risk strengthen the relationship between annual report complexity and firm profitability, suggesting that less-readable annual reports increase information asymmetry, companies' agency costs, and financial risk, which reduce their profitability. While this study extends the previous literature on annual report complexity and firm profitability, it examines the moderating effect of agency costs and financial risk on the relationship between annual report complexity and firm profitability of Egyptian companies.