Differential patterns of textual characteristics and company performance in the chairman's statement

Abstract

Purpose – The purpose of this paper is to assess the effect of financial performance on the textual characteristics of the chairman's statement. In particular, given the increased motives for poorly performing management to engage in impression management, the paper focuses on whether companies' reporting strategies depend on underlying financial performance. Design/methodology/approach – The research questions are investigated by examining a range of textual characteristics in the chairman's statements of 100 extremely profitable and extremely unprofitable UK listed companies. Findings – The results in this paper indicate that the chairman's statement is subject to impression management techniques as managers' propensity to associate themselves with company financial results is associated with the firm's underlying financial performance. There is also some evidence that unprofitable companies focus more on the future, rather than on past performance. Research limitations/implications – The paper shows the results of this study are based on samples of extremely profitable or extremely unprofitable companies and thus represent the tails of the distribution; further research using random sampling could investigate the extent to which the findings hold for all companies. Additional factors, such as changes in board membership, could also be examined in future research. Practical implications – The research in this paper has implications for the current state of financial reporting whereby auditors do not formally audit, but instead review, the chairman's statement to ascertain its consistency with the financial statements. Originality/value – The paper will be of value to academic researchers in the field of impression management and to users of annual reports who may rely on the chairman's statement for decision making.