Abstract
The present study aims to identify the impact of the tone of risk reporting narratives on company market value. The paper uses a sample of 34 Portuguese non-finance companies with shares traded at the Euronext Lisbon stock exchange market. The paper conducts an automated content analysis of the risk reporting narratives included in the risk and risk management sections of the annual reports for 2018 by using the software DICTION 7 (Digitext, Inc., Austin, TX, USA) to retrieve the speech tone. Main findings indicate that the tone category “activity” is associated negatively with the company’s market value. This result shows that investors misprice risk information that incorporates traces of overconfidence, narcissistic self-confidence and heroic leadership. The present study extends prior literature by analyzing the economic incentives of the tone of risk reporting narratives, not yet studied. Findings are both relevant to investors to support their decision-making processes and managers to strategically manage their risk communication tactics and benefit from the advantages emanated from them. Limitations related to the research setting do not undermine the generalization of findings because the automated algorithm provided by DICTION assures the content analysis’s reliability. The sample used corresponds to the population of the Portuguese non-finance listed companies.
Highlights
Published: 1 May 2021Globalization, business fraud scandals and the complexity of risks are some of the aspects that have intensified companies’ search for effective alternatives for risk control and management (Shad et al 2019; Lechner and Gatzert 2018)
We focus on a Portuguese setting to explore the specificities of these risk communication strategies related to a stakeholder-oriented corporate governance model research setting, never studied hitherto
The present study has the following structure: Section 2 presents the concept of risk; Section 3 documents the theoretical frameworks used in the risk reporting literature; Section 4 develops the literature review and hypothesis; Section 5 describes the research design; Section 6 discusses the main findings; and, Section 7 presents the main conclusions, limitations and clues for further research
Summary
Globalization, business fraud scandals and the complexity of risks are some of the aspects that have intensified companies’ search for effective alternatives for risk control and management (Shad et al 2019; Lechner and Gatzert 2018). Code, issued by the Portuguese Institute of Corporate Governance (IPCG) in 2018 These regulations require companies to present non-financial information in their annual reports regarding issues of social and environmental nature and risk information (risk exposures and risk mitigation policies). These regulations have been providing more security to investors and regulators in the inspection process, it is clear that from the preparer’s perspective, many of these narratives can include rhetorical manipulation strategies with the potential to generate market distrust (Shrives and Brennan 2017). The present study has the following structure: Section 2 presents the concept of risk; Section 3 documents the theoretical frameworks used in the risk reporting literature; Section 4 develops the literature review and hypothesis; Section 5 describes the research design; Section 6 discusses the main findings; and, Section 7 presents the main conclusions, limitations and clues for further research
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