The Relationship between Annual Report Readability and Cost of Capital: Cambodian Evidence

Abstract

 Purpose: This study investigates whether external financiers in emerging markets incorporate annual report readability into their firm valuation decisions. Specifically, it examines the association between the readability of annual reports issued by Cambodian-listed firms and variations in the cost of external financing.

Methodology: The study employs the weighted average cost of capital (WACC) and the Flesch Reading Ease (FRE) index as proxies for the cost of capital and annual report readability, respectively. Using a panel data framework, regression analysis is conducted on a sample comprising all firms listed on the Cambodian Securities Exchange (CSX) from 2020 to 2025.

Findings: The findings reveal a negative association between FRE and WACC, suggesting that firms with less readable disclosures incur higher external financing costs.

Implications: For regulators in emerging markets such as Cambodia, the results underscore the need to promote disclosure frameworks that enhance transparency and readability, thereby improving market efficiency and reducing information asymmetry. For corporate managers, the evidence highlights that improving the readability of annual reports is not merely a compliance exercise but a strategic tool for lowering financing costs and enhancing firm value.

Originality: This study is among the earliest empirical investigations of the relationship between disclosure readability and the cost of capital in Cambodia. It provides novel evidence on how the readability of financial reporting influences investors’ financing decisions in emerging markets.

Limitations and directions for future research: – This study relies on specific proxies to capture key constructs; future research may employ alternative measures of the cost of capital and readability to enable comparative analysis and enhance robustness. It is also based on a relatively small sample drawn from a single country. Subsequent research could improve generalizability by using larger, multi-country datasets.