Narratives vs Numbers in the Annual Report: Are They Giving the Same Message to the Investors?

Pascal Balata · Gaëtan Breton

37 citations0/0 files storedReview of Accounting and Finance

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

The annual report has two parts, financial statements and narrative sections. Commentators have raised doubts about the harmony of the two parts. The financial statements are audited, therefore submitted to a form of control. The narrative sections are free style, open to confusion and manipulation. Users are potentially exposed to contradictory messages producing an effect of dissonance. We do not test the presence of dissonance for the users, but the presence of contradictory information prone to produce dissonant effect. We conduct a content analysis of the president letter and we build an index of the level of optimism contained in it. Then, we compare this index with the change in key numbers or ratios from the financial statements. Our results indicate a moderate level of divergence between the narrative sections and the accounting data. However, this level is sufficient to raise questions about the necessity to regulate the discourse accompanying the financial statements.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2017A Theory of Cognitive Dissonance 2019Content Analysis: An Introduction to Its Methodology 1990Basic Content Analysis 1968An Empirical Evaluation of Accounting Income Numbers 1968The Information Content of Annual Earnings Announcements 2000Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators 1998Managing Public Impressions: Environmental Disclosures in Annual Reports

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