Is Textual Information Contained in Financial Documents Informative? Assessing Transparency using Textual Analysis

Despite abundant research on government transparency, there have been a limited number of empirical studies that assess government transparency by directly examining the content of information. Using 50 U.S. states from 2002 to 2016, this study examines the relationship between the tone of textual parts in financial documents and financial condition to understand whether governments provide important information about their operations in an easily understandable format (i.e., textual format). Conducting machine-aided textual analysis on Annual Comprehensive Financial Reports (ACFRs), this study finds that state governments ensure effective transparency by making what textual information indicates consistent with objective measures of financial condition. As financial conditions change, states adjust the tone of textual parts accordingly, which can be more easily understood by laypeople than complicated numbers in financial statements. The findings also suggest that declining financial conditions do not lead states to increase the use of uncertainty words to mask negative financial information. This study enhances our understanding of the meaning of transparency, and thereby contributes to the development of accountable public management practices and good governance.