IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v65y2018i2p380-398.html
   My bibliography  Save this article

Firm performance, reporting goals, and language choices in narrative disclosures

Author

Listed:
  • Asay, H. Scott
  • Libby, Robert
  • Rennekamp, Kristina

Abstract

We use an experiment with experienced managers to provide more-direct evidence on how reporting goals and firm performance influence language choices. We find that bad news disclosures are less readable than good news, but only when managers have a stronger self-enhancement motive. Our results suggest that this difference is driven mainly by attempts to write more readable good news reports as opposed to intentional obfuscation of poor performance. In order to frame poor performance in a positive light, managers also focus more on the future, provide causal explanations for poor performance, and use more passive voice and fewer personal pronouns.

Suggested Citation

  • Asay, H. Scott & Libby, Robert & Rennekamp, Kristina, 2018. "Firm performance, reporting goals, and language choices in narrative disclosures," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 380-398.
    • Handle: RePEc:eee:jaecon:v:65:y:2018:i:2:p:380-398
    DOI: 10.1016/j.jacceco.2018.02.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410118300181
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2018.02.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bonsall, Samuel B. & Leone, Andrew J. & Miller, Brian P. & Rennekamp, Kristina, 2017. "A plain English measure of financial reporting readability," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 329-357.
    2. Biddle, Gary C. & Hilary, Gilles & Verdi, Rodrigo S., 2009. "How does financial reporting quality relate to investment efficiency?," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 112-131, December.
    3. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    4. Steven J. Kachelmeier & Bernhard E. Reichert & Michael G. Williamson, 2008. "Measuring and Motivating Quantity, Creativity, or Both," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 341-373, May.
    5. Kristina Rennekamp, 2012. "Processing Fluency and Investors’ Reactions to Disclosure Readability," Journal of Accounting Research, Wiley Blackwell, vol. 50(5), pages 1319-1354, December.
    6. Brian J. Bushee & Ian D. Gow & Daniel J. Taylor, 2018. "Linguistic Complexity in Firm Disclosures: Obfuscation or Information?," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 85-121, March.
    7. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    8. Tim Loughran & Bill McDonald, 2014. "Regulation and financial disclosure: The impact of plain English," Journal of Regulatory Economics, Springer, vol. 45(1), pages 94-113, February.
    9. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
    10. Lawrence, Alastair, 2013. "Individual investors and financial disclosure," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 130-147.
    11. Core, John E., 2001. "A review of the empirical disclosure literature: discussion," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 441-456, September.
    12. Brian Rutherford, 2003. "Obfuscation, Textual Complexity and the Role of Regulated Narrative Accounting Disclosure in Corporate Governance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 7(2), pages 187-210, June.
    13. Bloomfield, Robert, 2008. "Discussion of "Annual report readability, current earnings, and earnings persistence"," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 248-252, August.
    14. Guay, Wayne & Samuels, Delphine & Taylor, Daniel, 2016. "Guiding through the Fog: Financial statement complexity and voluntary disclosure," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 234-269.
    15. Kida, T, 1984. "The Impact Of Hypothesis-Testing Strategies On Auditors Use Of Judgment Data," Journal of Accounting Research, Wiley Blackwell, vol. 22(1), pages 332-340.
    16. Asay, H. Scott & Libby, Robert & Rennekamp, Kristina M., 2018. "Do features that associate managers with a message magnify investors’ reactions to narrative disclosures?," Accounting, Organizations and Society, Elsevier, vol. 68, pages 1-14.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xi Wu & Xinle Tong & Yudong Wang, 2022. "Managerial ability and idiosyncratic volatility," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2566-2581, April.
    2. Ardia, David & Bluteau, Keven & Boudt, Kris, 2022. "Media abnormal tone, earnings announcements, and the stock market," Journal of Financial Markets, Elsevier, vol. 61(C).
    3. Qian Wang & Duowen Wu & Lina Yan, 2021. "Effect of positive tone in MD&A disclosure on capital structure adjustment speed: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5809-5845, December.
    4. Asay, H. Scott & Libby, Robert & Rennekamp, Kristina M., 2018. "Do features that associate managers with a message magnify investors’ reactions to narrative disclosures?," Accounting, Organizations and Society, Elsevier, vol. 68, pages 1-14.
    5. Moreno, Alonso, 2024. "Impression management in bilingual corporate reporting: An analysis of textual characteristics in Spanish and English," Research in International Business and Finance, Elsevier, vol. 70(PA).
    6. Woon Leong Lin, 2024. "Too little of a good thing? Curvilinear effects of corporate social responsibility on corporate financial performance," Review of Managerial Science, Springer, vol. 18(8), pages 2197-2228, August.
    7. Ling Tuo & Yu (Tony) Zhang & Zhenfeng Liu & Ruixue Du, 2019. "Business Education of CEO-CFO and Annual Report Readability," Review of Economics & Finance, Better Advances Press, Canada, vol. 17, pages 16-34, August.
    8. Kong, Dongmin & Shi, Lu & Zhang, Fan, 2021. "Explain or conceal? Causal language intensity in annual report and stock price crash risk," Economic Modelling, Elsevier, vol. 94(C), pages 715-725.
    9. Hyunkwon Cho & Robert Kim, 2021. "Asymmetric effects of voluntary disclosure on stock liquidity: evidence from 8‐K filings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 803-846, March.
    10. Bassyouny, Hesham & Abdelfattah, Tarek & Tao, Lei, 2020. "Beyond narrative disclosure tone: The upper echelons theory perspective," International Review of Financial Analysis, Elsevier, vol. 70(C).
    11. Satoshi Taguchi & Yoshio Kamijo, 2018. "Intentions behind disclosure to promote trust under short-termism: An experimental study," Working Papers SDES-2018-8, Kochi University of Technology, School of Economics and Management, revised Oct 2018.
    12. Yongjun Tang & Qi Li & Fen Zhou & Mingjia Sun, 2024. "Does Clan Culture Promote Corporate Natural Resource Disclosure? Evidence from Chinese Natural Resource-Based Listed Companies," Journal of Business Ethics, Springer, vol. 192(1), pages 167-190, June.
    13. Gutiérrez‐Ponce Herenia & Chamizo González Julián & Manar Moffadi Awad Al‐mohareb, 2024. "Does corporate governance influence readability of the report by the chairman of the board of directors? The case of Jordanian listed companies," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3535-3550, July.
    14. Chychyla, Roman & Leone, Andrew J. & Minutti-Meza, Miguel, 2019. "Complexity of financial reporting standards and accounting expertise," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 226-253.
    15. Bassyouny, Hesham & Abdelfattah, Tarek & Tao, Lei, 2022. "Narrative disclosure tone: A review and areas for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).
    16. Jie He & Kam C. Chan, 2023. "Does short sales deregulation affect qualitative information disclosure?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1351-1380, April.
    17. Jianguo Chen & David Smith, 2024. "Disclosure policy choice, stock returns and information asymmetry: Evidence from capital expenditure announcements," Australian Journal of Management, Australian School of Business, vol. 49(2), pages 192-213, May.
    18. Johannes Brunzel, 2023. "Linguistic cues of chief executive officer personality and its effect on performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 215-243, January.
    19. Brink, Alisa G. & Eller, C. Kevin & Gao, Lei, 2021. "He wouldn't, but I would: The effects of pronoun-induced language vividness in whistleblowing policies," Advances in accounting, Elsevier, vol. 54(C).
    20. Iqbal, Javid & Saeed, Abubakr, 2023. "Managerial sentiments, non-performing loans, and banks financial performance: A causal mediation approach," Chaos, Solitons & Fractals, Elsevier, vol. 171(C).
    21. Shuyu Zhang & Walter Aerts & Dunli Zhang & Zishan Chen, 2022. "Positive tone and initial coin offering," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2237-2266, June.
    22. Fahd Alduais & Nashat Ali Almasria & Abeer Samara & Ali Masadeh, 2022. "Conciseness, Financial Disclosure, and Market Reaction: A Textual Analysis of Annual Reports in Listed Chinese Companies," IJFS, MDPI, vol. 10(4), pages 1-22, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bonsall, Samuel B. & Leone, Andrew J. & Miller, Brian P. & Rennekamp, Kristina, 2017. "A plain English measure of financial reporting readability," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 329-357.
    2. Samuel B. Bonsall & Brian P. Miller, 2017. "The impact of narrative disclosure readability on bond ratings and the cost of debt," Review of Accounting Studies, Springer, vol. 22(2), pages 608-643, June.
    3. Rjiba, Hatem & Saadi, Samir & Boubaker, Sabri & Ding, Xiaoya (Sara), 2021. "Annual report readability and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 67(C).
    4. Jia, Jing & Li, Zhongtian, 2022. "Risk management committees and readability of risk management disclosure," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    5. Umar, Tarik, 2022. "Complexity aversion when SeekingAlpha," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    6. Minxing Sun & Weike Xu, 2024. "Short selling and readability in financial disclosures: A controlled experiment," The Financial Review, Eastern Finance Association, vol. 59(2), pages 265-292, May.
    7. Chung, Dennis Y. & Hrazdil, Karel & Novak, Jiri & Suwanyangyuan, Nattavut, 2019. "Does the large amount of information in corporate disclosures hinder or enhance price discovery in the capital market?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 36-52.
    8. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    9. Soliman, Marwa & Ben-Amar, Walid, 2022. "Corporate social responsibility orientation and textual features of financial disclosures," International Review of Financial Analysis, Elsevier, vol. 84(C).
    10. de Souza, João Antônio Salvador & Rissatti, Jean Carlo & Rover, Suliani & Borba, José Alonso, 2019. "The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics," Research in International Business and Finance, Elsevier, vol. 48(C), pages 59-74.
    11. Yao, Yanzhen & Wei, Lu & Jing, Haozhe & Chen, Meiqi & Li, Zhan, 2024. "The impact of readability of risk disclosures in bond prospectuses on credit risk premium," Research in International Business and Finance, Elsevier, vol. 70(PA).
    12. Hasan, Mostafa Monzur & Habib, Ahsan, 2020. "Readability of narrative disclosures, and corporate liquidity and payout policies," International Review of Financial Analysis, Elsevier, vol. 68(C).
    13. Muhammad Nadeem, 2022. "Board Gender Diversity and Managerial Obfuscation: Evidence from the Readability of Narrative Disclosure in 10-K Reports," Journal of Business Ethics, Springer, vol. 179(1), pages 153-177, August.
    14. Humphery-Jenner, Mark & Liu, Yun & Nanda, Vikram & Silveri, Sabatino & Sun, Minxing, 2024. "Of fogs and bogs: Does litigation risk make financial reports less readable?," Journal of Banking & Finance, Elsevier, vol. 163(C).
    15. Kong, Dongmin & Shi, Lu & Zhang, Fan, 2021. "Explain or conceal? Causal language intensity in annual report and stock price crash risk," Economic Modelling, Elsevier, vol. 94(C), pages 715-725.
    16. Chychyla, Roman & Leone, Andrew J. & Minutti-Meza, Miguel, 2019. "Complexity of financial reporting standards and accounting expertise," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 226-253.
    17. Mousa, Gehan A. & Elamir, Elsayed A.H. & Hussainey, Khaled, 2022. "The effect of annual report narratives on the cost of capital in the Middle East and North Africa: A machine learning approach," Research in International Business and Finance, Elsevier, vol. 62(C).
    18. de Kok, Ties, 2019. "Essays on reporting and information processing," Other publications TiSEM 468fd12b-19c0-4c7b-a33a-6, Tilburg University, School of Economics and Management.
    19. Asiri, Mohammed & Al-Hadi, Ahmed & Taylor, Grantley & Duong, Lien, 2020. "Is corporate tax avoidance associated with investment efficiency?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    20. Lisa Koonce & Zheng Leitter & Brian White, 2023. "The effect of a warning on investors’ reactions to disclosure readability," Review of Accounting Studies, Springer, vol. 28(2), pages 769-791, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:65:y:2018:i:2:p:380-398. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.