Abstract:
Corporate annual reports have increased in size over time, not only to contain financial
data but a plethora of narrative explanations concerning the firm’s current performance
and their prospects. This thesis attempts to fill the gaps presented in the field of research
of narrative disclosure in corporate reports by conducting three interconnected studies
presented in a journal article manuscript form. The first paper provides an understanding
of the drivers and consequences of narrative disclosure in corporate reports by conducting
a systematic literature review of existing studies. The aim is to get a full understanding
behind the intentions and consequences of narrative disclosures, to identify the gaps in
research, and to provide recommendations for future research. The second paper focuses
on the consequences of the readability of narratives, as an impression management
technique in corporate annual reports. This study expands existing literature by not only
analysing the reading difficulty of narratives but also touching on the use of ambiguous.
It is found that readability (using both readability and ambiguity measures) are negatively
associated with firm performance, indicating management’s use of impression
management to obfuscate adverse performance, resulting in the reduction of performance
persistence and firm value. The third paper focuses on earnings management as the driver
of the tone of narratives. The study aims to find that relationship between earnings
management (using accruals-based and real activities-based earnings management) and
the tone of narratives, during two different strategic incentives that drive managers to
manipulate earnings (meeting or beating prior year’s earnings and leverage increase). It
is found that when managers practice income-increasing (decreasing) earnings
management the tone is positive (negative). The findings signify that whether the
intention is beneficial or harmful to investors, the tone of narratives is biased towards
management’s intentions of earnings management practices.
