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Executives vs. governance: who has the predictive power? Evidence from narrative tone

Executives vs. governance: who has the predictive power? Evidence from narrative tone
Executives vs. governance: who has the predictive power? Evidence from narrative tone
This study aims to investigate not only Narrative Disclosure Tone predictive power, but also who has this power within companies to predict future performance in the UK context (executive vs. governance). We conduct a computerized textual analysis to measure the tone of UK annual reports narratives. Our results contribute to accounting and financial reporting literature by showing that corporate narrative tone can predict future performance. However, answering our main question about who has this predictive power, we found executives’ reporting tone has the power to predict a company’s future performance but not governance tone. Considering the moderation effect of the 2014 financial reporting guidance, we found this guidance increases corporate narrative tone power in general and executive tone in particular in predicting future performance. Moreover, the current study contributes to financial reporting literature by providing a UK evidence, which operates under the principles-based approach with more flexibility in financial reporting than the US context that follows the rules-based approach. Finally, this study has practical implications for regulators and external users of financial reporting.
Narrative reporting, Tone predictive power, textual analysis, Executives, governance
0924-865X
361–382
Bassyouny, Hesham
b7dc8b27-a0a3-4b3c-be6b-17abc38e3087
Abdelfattah, Tarek
c97bf00f-7dba-4077-b005-67049156284b
Bassyouny, Hesham
b7dc8b27-a0a3-4b3c-be6b-17abc38e3087
Abdelfattah, Tarek
c97bf00f-7dba-4077-b005-67049156284b

Bassyouny, Hesham and Abdelfattah, Tarek (2021) Executives vs. governance: who has the predictive power? Evidence from narrative tone. Review of Quantitative Finance and Accounting, 58, 361–382. (doi:10.1007/s11156-021-00997-y).

Record type: Article

Abstract

This study aims to investigate not only Narrative Disclosure Tone predictive power, but also who has this power within companies to predict future performance in the UK context (executive vs. governance). We conduct a computerized textual analysis to measure the tone of UK annual reports narratives. Our results contribute to accounting and financial reporting literature by showing that corporate narrative tone can predict future performance. However, answering our main question about who has this predictive power, we found executives’ reporting tone has the power to predict a company’s future performance but not governance tone. Considering the moderation effect of the 2014 financial reporting guidance, we found this guidance increases corporate narrative tone power in general and executive tone in particular in predicting future performance. Moreover, the current study contributes to financial reporting literature by providing a UK evidence, which operates under the principles-based approach with more flexibility in financial reporting than the US context that follows the rules-based approach. Finally, this study has practical implications for regulators and external users of financial reporting.

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More information

e-pub ahead of print date: 18 June 2021
Keywords: Narrative reporting, Tone predictive power, textual analysis, Executives, governance

Identifiers

Local EPrints ID: 470489
URI: http://eprints.soton.ac.uk/id/eprint/470489
ISSN: 0924-865X
PURE UUID: 8459ea7a-5feb-43c6-b13b-028391eae195
ORCID for Hesham Bassyouny: ORCID iD orcid.org/0000-0002-7393-3544

Catalogue record

Date deposited: 11 Oct 2022 16:54
Last modified: 17 Mar 2024 04:13

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Contributors

Author: Hesham Bassyouny ORCID iD
Author: Tarek Abdelfattah

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