Annual Report Narratives Research Articles

Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

PurposeThis paper aims to investigate the association between negative tone in annual report narratives and future performance in the UK context. Under the principle-based approach in the UK, managers tend to bias the tone of narrative reports upward, as the reporting regime is more flexible than the rule-based approach in the USA. Consequently, any negative disclosure not mandated by regulators conveys credible information about a firm’s prospects.Design/methodology/approachThis paper uses a sample of UK FTSE all-share non-financial companies from 2010 to 2019. The authors use the textual-analysis approach based on Loughran and McDonald (2011)’s wordlist (LM) to measure the negative tone in UK annual reports.FindingsThe results show a significant negative association between negative tone and future performance. Moreover, our further analyses suggest that only the negativity in the executive section of the annual disclosures correlates significantly with future performance. In summary, this study suggests that negativity does matter under the principle-based approach and can be used as an indicator of future performance.Originality/valueIn contrast to the literature arguing that only positivity has the power to affect a firm’s outcomes under the principle-based approach, the authors provide new empirical evidence suggesting that negativity also matters within the UK context and can be used as an indicator for future performance. Also, to the best of the authors’ knowledge, this is the first study to identify which section of the annual report is more informative about a firm’s future performance.

Board attributes and corporate social responsibility disclosure quality based on information typology

PurposeThis paper aims to answer whether board attributes affect corporate social responsibility disclosure quality (CSRDQ) and whether these findings are sensitive to CSRDQ measurement.Design/methodology/approachThe authors use the content analysis method to measure CSRDQ in annual report narratives of 41 Mauritian-listed companies for 2008–2019. System-generalized method of moments is used to test research hypotheses.FindingsThe analysis shows that board attributes affect CSRDQ. It also shows that the impact of CSRDQ is sensitive to CSRDQ measurement.Practical implicationsThis study informs stakeholders on the drivers of CSRDQ. Mauritius authorities could revise the corporate governance code to enhance CSRDQ, and the Stock Exchange of Mauritius could also provide regulations/guidance to listed companies to improve their CSRDQ.Originality/valueThis study brings new insights by viewing CSRDQ based on verifiability, as verifiable CSR reporting improves the fairness of information disclosed by management.

Impression management tactics in Covid-19 related disclosures: a study on the annual reports of Bangladeshi listed insurance companies

PurposeThe purpose of this article is to explore the impression management practices in Covid-19 related discourses in the annual reports of the insurance companies in Bangladesh.Design/methodology/approachTo fulfil this objective, the authors have conducted a discourse analysis of the Covid-19 related corporate narratives in the latest annual reports of listed insurance companies. The findings are then interpreted through the lens of impression management theory, following the impression management strategies identified by Caliskan et al. (2021).FindingsIt is found that companies tried to manage the impression of the stakeholders through the strategic use of language. There is evidence that the companies used assertive and performance-oriented tactics to impress their stakeholders. In few cases, defensive strategies were applied.Practical implicationsThis study will facilitate improving the understanding of corporate communication during the Covid-19 crisis. Policymakers will be able to understand the current status of Covid-19 related disclosures and consider the necessity to provide guidance that may lead to better accountability during the crisis.Originality/valueThis study will contribute to the limited literature on Covid-19 related disclosure from the context of developing economies. This research is methodologically novel as it applies discourse analysis and interprets the findings through the lens of impression management.

The effect of annual report narratives on the cost of capital in the Middle East and North Africa: A machine learning approach

This paper contributes to accounting literature by reexamining the impact of the quantity and readability of annual report narratives on cost of capital. This study employs a machine learning technique, namely, the model-based (MOB) recursive partitioning, while the least absolute shrinkage and selection operator is used to select variables from a sample of 720 bank–year observations from eight Middle Eastern and North African countries between 2008 and 2019. The model-based (MOB) recursive partitioning works with local and global models to explore hidden information in the data that leads to better results in both linear and nonlinear relationships. Our analysis shows that, on one hand, the readability of annual report narratives has an insignificant impact on cost of capital. On the other hand, it shows that the greater the amount of narrative disclosure, the lower the cost of capital, a result that varies between countries and according to corporate profitability.

Structuring Servitization-Related Capabilities: A Data-Driven Analysis

The existing literature investigates organizational capabilities for servitization in exploratory studies based predominantly on interviews with managers. This has led to classification frameworks that tend to reflect managerial perceptions regarding key capabilities (rather than actual firm capabilities) and in which associations and connections between capabilities remain anecdotal. This study examines the servitization-related capabilities existing in manufacturing firms that have taken strategic service initiatives and adopts a data-driven approach to explore their underlying structure. A quantitative study based on secondary data from annual report narratives is used to assess the servitization-related capabilities of 79 firms from the aerospace and defense sector and to identify the underlying factors through exploratory factor analysis. The study identifies seventeen capabilities structured into five factors: (i) management of production/delivery operations; (ii) development of valuable and sustainable offerings; (iii) identification of incentives; (iv) planning for uncertainty and change; and (v) relationship management. The study provides evidence of servitization-related capabilities in practice. By examining gaps between existing (current) capabilities and the capabilities identified in our five-factor model, business managers of aerospace and defense firms can assess the status of servitization-related capabilities at their firms and set objectives to develop such capabilities further. The study contributes to the systematic development of a reasonable and parsimonious representation of organizational capabilities for servitization, which is statistically supported and validated through empirical data.

Risk Disclosure and Corporate Cash Holdings

In this paper, we extend corporate disclosure and corporate cash holdings literature by testing whether corporate voluntary risk disclosure affects corporate cash holdings for a sample of Tunisian non-financial listed companies. As a measure of risk disclosure, we use manual content analysis to count the number of risk-related sentences in the narrative sections of corporate annual reports. As a measure of corporate cash holdings, we use the ratio of cash and cash equivalent over the total assets. Using a sample of 140 firm-year observations for the period of 2008–2013, we find that corporate risk disclosure has a negative impact on corporate cash holdings. Our results are consistent with agency, legitimacy and impression management theories. Our paper adds to the existing literature by being the first empirical evidence for the impact of risk disclosure on cash holdings. Our findings offer policy implications relevant for the current debate on the reliability of narrative risk disclosure and whether managers inform or obfuscate stakeholders by disclosing more risk-related information in their annual report narratives.

The Correlation Between Annual Reports’ Narratives and Business Performance: A Retrospective Analysis

This article investigates the extant literature on the correlation between narratives in corporate annual reports and corporate performance. Prior studies are reviewed for overall characteristics, research topics, theoretical foundations, and methods. Articles published between 2000 and 2018 were analyzed using the content analysis method. The results demonstrated that prior studies generally show an increasing trend with salient interdisciplinarity. Mapping and predictability between annual reports’ narratives and business performance have been the prevailing topics. The impression management and agency theories are the most frequent theoretical references. More importantly, complexity of research methods was found in data, analytical approaches, and variables. The emphasis on narratives in prior research proves the necessity of contextualizing narratives in business communication. Future work would benefit from a “narrative framework” that incorporates linguistic, socio-cultural, and organizational perspectives into the correlation study. The article presents the first study to investigate the correlation studies through content analysis.

Bibliometric analysis of literature on narrative discourse in corporate annual reports (1990–2019)

This article presents a bibliometric analysis of prior studies on narratives in corporate annual reports (CARs) between 1990 and 2019. It is found that studies in the past longitudinally follow an ascending trend with uneven distribution across disciplines and nations. Their primary data source is the entire CAR or its components. Usually based on the content or textual analytical approaches, they aim to uncover the mapping of narrative discourse onto the corporate performance. Their hotspots include CARs’ readability, financial reporting aggressiveness, firm disclosure genres, firm disclosure content, and corporate impression management. They rely heavily upon the theoretical or methodological frameworks involving corporate governance, dictionary, machine learning, and statistical modeling. Findings of the present research point to five under-investigated areas that need future research.

Narrative disclosure quality and the timeliness of goodwill impairments

This paper studies the relation between the quality of corporate narrative disclosure and the timeliness of goodwill impairments. We combine five measures of the linguistic content of annual report narratives to generate a proxy for narrative disclosure quality. To measure the timeliness of impairments, we deploy a model that relates observed goodwill impairments to the main determinants of impairments identified by prior literature, focusing especially on current period negative stock returns. We hypothesise and find that the impairments of firms with low-quality narrative disclosures are less timely than the impairments of firms with high-quality disclosures. In addition, using a signalling argument, we hypothesise, and find that the market response to goodwill impairments is more negative for firms with low disclosure quality.

Accounting as a dehumanizing force in colonial rhetoric: Quantifying native peoples in annual reports

• The British Crown outsourced government to the British South Africa Company (BSAC). • To colonize Rhodesia (present-day Zimbabwe). • The paper examines quantification of native peoples in BSAC annual reports. • Quantification dehumanized the native peoples, sanitizing their deaths. • The BSAC used annual reports to mask its exploitation of the native population. This paper examines quantification adopted by the British South Africa Company (BSAC) in its portrayal of native peoples in annual reports. In its colonization and administration of Southern Rhodesia (present-day Zimbabwe), through a royal charter, the British Crown outsourced government to the BSAC, a private-sector, for-profit company. The royal charter imposed non-economic, public-benefit responsibilities on the company, including duties for advancing the native peoples’ interests. The research analyzes annual-report narratives referencing native peoples extracted from a continuous collection of the BSAC’s first 29 annual reports over a 35-year period, 1889–1924. The analysis focusses on the BSAC’s quantification of the natives, their deaths, their health and their livestock, supplemented by analyzing the BSAC’s use of rhetorical framing and the rhetoric of silence in its portrayal of native peoples. The BSAC mobilized quantification rhetoric to demonstrate delivery of its responsibilities/duties to advance the native peoples’ interests. Quantification dehumanized the native peoples, sanitizing their deaths in service of the company’s profitability, for the London audience for the BSAC’s annual reports. The BSAC silenced the supposed beneficiaries’ voices, the native peoples. The findings highlight how the BSAC used supposedly neutral annual reports as an instrument to mask its exploitation of the colony’s native population. The paper contributes to an understanding of how colonialists used accounting as an instrument to promulgate colonial propaganda and ambitions and to mask the means by which they achieved their objectives.

Corporate reporting to the crown: a longitudinal case from colonial Africa

PurposeA royal charter of incorporation imposing public benefit/social responsibilities established the privately owned British South Africa Company (BSAC), in return for power to exploit a huge territory using low-cost local labour. This study explores the dual principal–agent problem of how the BSAC used annual report narratives to report on its conflicting economic responsibilities to investors versus its public benefit charter responsibilities to the British Crown.Design/methodology/approachHaving digitised the dataset, the research analyses narratives from 29 BSAC annual reports spanning a continuous 35-year royal charter period, using computer-aided keyword content analysis to identify economic-orientated versus public benefit-orientated annual report narratives. The research analyses how the annual report narratives shifted according to four key contextual periods by reference to the changing influence of private investors versus the British Crown.FindingsThere are two key findings. First, economic primacy. At no point do public benefit disclosures outweigh economic disclosures. Second, the BSAC's meso-corporate context and macro-social/political context can explain patterns in public benefit disclosures. The motivation for producing public benefit information is not altruism. Rather, commercial interests motivate disclosure. The BSAC used its annual reports to sustain what proved ultimately unsustainable – royal charter-style colonialism.Originality/valueThis accounting history study contributes to an understanding of corporate narrative reporting using one of the earliest known cases of such analysis and shows how accounting plays a central role in facilitating a company in sustaining its interests. This 100-year lookback may be a portend of the future for modern-day annual report corporate social responsibility narratives in, say, mining and oil and gas company corporate reports, especially if these natural resources run out.

A multi-dimensional analysis of the Management's Discussion and Analysis narratives in Chinese and American corporate annual reports

The Management's Discussion and Analysis (MD&A) narratives in corporate annual reports (ARs) provide critical information for investors and financial analysts. This study reports results of a comparative multi-dimensional analysis of the linguistic features of MD&A narratives in the ARs produced by Chinese and American public companies on the 2015 Fortune Global 500 list. Our results show that, compared to the MD&A narratives produced by American companies, those produced by Chinese companies are more narrative, less explicit in expressing the authors’ views, and less technical, abstract and formal; they also have fewer features of on-line informational elaboration. The linguistic features of the MD&A narratives are not significantly affected by company size or profitability in the case of American companies, but they vary significantly by company size in the case of Chinese companies. Our findings contribute to a systematic understanding of the genre features of MD&A narratives in ARs of Chinese and American companies and have useful implications for Business English pedagogy in the context of China.

Understanding systemic change in the context of the social and environmental disclosures of a conservation organisation in a developing country

PurposeThis uses a framework of systemic change to understand the contextual factors including stakeholder, social, political, cultural and economic, which contribute to the social and environmental narratives of a conservation organisation that has and continues to undergo transformation.Design/methodology/approachThe social and environmental disclosure annual report narratives for a 27-year period were coded to a framework of systemic change.FindingsThe end of apartheid in 1994 meant that South African society required transformation. This transformation impacts and drives the social and environmental accounting disclosures made by SANParks. The social and environmental disclosures coded against a framework of systemic change, fluctuated over the period of the study as the format of the annual reports changed. The systems view was the most frequently disclosed category. The political ecology subcategory which details the power relationships showed the most disclosures. However, 25 years after the end of apartheid, the transformation process remains incomplete. Although the evidence in the paper does not support Joseph and Reigelut (2010) contention that the framework of systemic change is an iterative process, it nevertheless provides a useful vehicle for analysing the rich annual report narratives of an organisation that has undergone and continues to undergo transformation.Originality/valueThis paper makes two primary contributions. First, to the limited developing country social and environmental accounting literature. Second, the development, refinement and application of a framework of systemic change to social and environmental disclosures.

R&D Narratives in Annual Reports of European Biopharmaceutical Companies

This study has two objectives. Firstly, it explores how do R&D narratives differ in various clusters of biopharmaceutical companies in terms of discussion context and text readability. Secondly, it examines whether the way how biopharmaceutical companies depict their business within R&D context is dependent on R&D expenses or R&D intensity levels. The paper contributes to the literature in applying qualitative and quantitative methods.

Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-shaped Relation

We hypothesize and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.

Psychopathic traits of corporate leadership as predictors of future stock returns

AbstractThis paper examines whether it is possible to forecast 1‐year‐ahead returns of individual companies based on the observed ‘psychopathic’ characteristics of their top management team. We find that language characteristic of psychopaths present in annual report narratives, questionable integrity, excessive risk‐taking, and failure to contribute to charitable undertakings tend to reduce future shareholder wealth. These findings imply that firms could benefit from incorporating psychological evaluation in their recruitment processes, especially when seeking to fill senior management posts. While the return predictability described in this paper supports the upper echelons perspective, it simultaneously challenges the notion of informationally efficient stock prices.

Strategic renewal during technology change: Tracking the digital journey of legacy news companies

ABSTRACTDigitization represents an incrementally competence-destroying technology change for legacy news companies. This study analyses strategic and operational renewal of six incumbent news publishers in the UK, Finland, and Switzerland based on narratives of their annual reports. Their digital journey is coined by two transformations: digitizing news business operations and lateral diversification into non-news-related digital markets. Thereby, willpower represents a corporate capacity that indicates the willingness for renewal. Lateral diversification renews the companies’ profit formula, which leads to a negative cost-benefit perception regarding future investments in digital journalism by some incumbents. These incumbents communicatively prepare to incrementally abandon their core journalism business. From the communicative constitution of organizations (CCO) perspective, annual report narratives represent instruments for legitimizing corporate restructuring and repositioning.

Non-financial KPIs in annual report narratives: Australian practice

Purpose The purpose of this paper is to provide preliminary evidence on current practices in non-financial key performance indicator (KPI) reporting in annual reports by listed Australian companies to inform Australian legislators and accounting standard setters contemplating regulations and guidance for non-financial performance disclosure, including input into the revision of IFRS Practice Statement 1: Management Commentary (2010). Design/methodology/approach Non-financial KPIs were hand-collected from the annual report narratives of 40 listed Australian companies from five sectors in 2016. Trends in the type, quantity, comparability and range of non-financial KPIs were analysed, and the association between company characteristics and non-financial disclosure was explored. Findings In total, 78 per cent of the sampled companies disclose non-financial KPIs in their annual reports, reporting 11 non-financial KPIs per company on average. The most common category is Employee, followed by Environment, accounting for 68 per cent of non-financial KPIs. Provision of comparators is low, with only 28 per cent of non-financial KPIs disclosed with prior year results and 24 per cent disclosed with a target. Companies disclose across a median of two out of seven categories. Company size is shown to be associated with non-financial measures. Originality/value The study contributes initial detailed empirical Australian evidence of non-financial KPI reporting practices. A framework is established for assessing non-financial KPI disclosure, adding to voluntary disclosure studies. A data collection method is developed for collecting KPIs from annual report narratives, contributing to the methodology used in voluntary reporting content analysis.

Annual Reports: Fact or Fiction? Are There Governance Implications?

Two recent high-profile announcements of companies going into administration (Palmer & Harvey) and liquidation (Carillion) raise questions about the robustness of statements made in annual reports including the quality and objectivity of audit reporting, and the implications of this on Corporate Governance practice. This discussion coincides with the Financial Reporting Council 'Proposed Revisions to the UK Corporate Governance Code', December 2017. This paper considers some of the behavioural factors which influence performance and, most likely, performance reporting. It also considers some of the potentially fraudulent activity by firms, and the quality and nature of audit reporting in Annual Reports. Contexts of this paper are Agency Theory and Merger and Acquisition (M&A) activity. The next step in this research will be to increase the sample size and explore the scale of the issues being considered, and then develop recommendations for both corporate reporting narratives in Annual Reports, and the adoption of forensic accounting techniques in audit reporting.

Annual Report Narratives and the Cost of Equity Capital: U.K. Evidence of a U-Shaped Relation

We hypothesise and test for a U-shaped relation between the cost of equity capital and the level of disclosure in annual report narratives. Using a computer-generated word-count-based index of the level of disclosure in U.K. annual report narratives, we document a negative relation with the cost of equity capital at low levels of disclosure, and a positive relation at higher levels of disclosure, together implying the presence of an optimal level of disclosure. We interpret the positive relation at higher levels of disclosure as evidence of uninformative clutter increasing the cost of equity capital. Additional analyses indicate the presence of both firm-level learning and regulatory corporate reporting initiatives as factors shaping adjustments towards optimum levels of disclosure.