THE CHAIRMAN'S STATEMENT AND CORPORATE FINANCIAL PERFORMANCE

Malcolm Smith · Richard Taffler

147 citations0/0 files storedAccounting and Finance

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Auditing, Earnings Management, Governance Corporate Finance and Governance Financial Reporting and XBRL

Abstract

Abstract: Agency theory and signalling theory both suggest that firms are motivated to disclose excellence of financial performance in an unambiguous manner. We might expect, therefore, that good financial performance is associated with a clear and readable Chairman's narrative and poor performance with an obscure or misleading message. Extant work linking corporate performance with clarity of executive narrative fails to distinguish sample cases by industry or financial status. This paper seeks to overcome the consequences of such deficiencies explicitly, by conducting a systematic analysis of the relationship between narrative complexity and alternative measures of financial performance, for a matched sample of failed/non‐failed companies across common industries. This study employs separate measures of the readability and the understandability of the chairman's narrative and finds them to be significantly related to overall financial performance and individual measures of performance, most notably liquidity. Poor readability is strongly associated with poor financial performance and ease of readability with relative financial success. The implication is that firms actively signal good news while obscuring, perhaps deliberately, messages which convey bad news.

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References

1985Positive Accounting Theory 1985The effect of bonus schemes on accounting decisions 2011The effects of bonus schemes on accounting decisions 1990Positive Accounting Theory: A Ten Year Perspective.1984Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements 1971An Empirical Analysis of the Quality of Corporate Financial Disclosure.1987Signalling, Agency Theory and Accounting Policy Choice 1983The Assessment of Company Solvency and Performance Using a Statistical Model

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