Narrative Analysis of Annual Reports - A Study of Communication Efficiency

Abstract

Content analysis of annual reports has been a strong research theme in the fields of business communication and corporate governance. We examine the quality and efficiency of corporate annual report disclosures in malevolent environments. We study Indian automobile industry annual reports encompassing the global recession period, viz., 2007-08 through 2011-12.We content analyze the Management Discussion and Analysis sections of annual reports. We choose the Indian automobile and auto-components industry as the context of our study for three reasons – there exists variety in (a) the forms of firms in the industry (domestic firms and MNE subsidiaries); (b) size (small to large); and (c) level of global integration (export intensity). The Indian automobile and auto-components industry has sufficiently integrated with the global economy with the creation of global supply chains and India becoming an important sourcing hub as well as a fast maturing consumer market.We study the relationship between textual complexity and firm performance in munificent environments. We use content analysis as a primary tool for studying textual complexity. Using the Flesch Reading Ease formula, we find that the reading ease of annual report texts vary significantly across years. The other variables that influence reading ease are proportion of market capitalization (size), promoter ownership and the extent of internationalization. In other words, bigger the size of companies, higher the promoter ownership and higher the extent of internationalization, the texts are easier to read. Other control variables including firm performance, age and diversification do not contribute to textual complexity.We contribute to organizational communication literature by adding environmental malevolence as a factor in determining textual complexity. We demonstrate that in years when the environment is difficult (such as a global recession), firms obfuscate their texts, irrespective of their financial performance. We demonstrate the relative importance of external variables (business recession, international exposure and stakeholder diversity) in influencing textual complexity than variables internal to the firm.