Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK
Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK
Purpose: this paper aims to investigate the association between negative tone in annual report narratives and future performance in the UK context. Under the principle-based approach in the UK, managers tend to bias the tone of narrative reports upward, as the reporting regime is more flexible than the rule-based approach in the USA. Consequently, any negative disclosure not mandated by regulators conveys credible information about a firm’s prospects.
Design/methodology/approach: this paper uses a sample of UK FTSE all-share non-financial companies from 2010 to 2019. The authors use the textual-analysis approach based on Loughran and McDonald (2011)’s wordlist (LM) to measure the negative tone in UK annual reports.
Findings: the results show a significant negative association between negative tone and future performance. Moreover, our further analyses suggest that only the negativity in the executive section of the annual disclosures correlates significantly with future performance. In summary, this study suggests that negativity does matter under the principle-based approach and can be used as an indicator of future performance
Originality/value: in contrast to the literature arguing that only positivity has the power to affect a firm’s outcomes under the principle-based approach, the authors provide new empirical evidence suggesting that negativity also matters within the UK context and can be used as an indicator for future performance. Also, to the best of the authors’ knowledge, this is the first study to identify which section of the annual report is more informative about a firm’s future performance.
Firm performance, Narrative disclosure, Negativity, Textual-analysis, United Kingdom
Bassyouny, Hesham
b7dc8b27-a0a3-4b3c-be6b-17abc38e3087
Machokoto, Michael
c7cbeeb7-34ba-48c9-aa3c-560eb24e97ec
Bassyouny, Hesham
b7dc8b27-a0a3-4b3c-be6b-17abc38e3087
Machokoto, Michael
c7cbeeb7-34ba-48c9-aa3c-560eb24e97ec
Bassyouny, Hesham and Machokoto, Michael
(2023)
Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK.
International Journal of Accounting and Information Management.
(doi:10.1108/IJAIM-01-2023-0001).
Abstract
Purpose: this paper aims to investigate the association between negative tone in annual report narratives and future performance in the UK context. Under the principle-based approach in the UK, managers tend to bias the tone of narrative reports upward, as the reporting regime is more flexible than the rule-based approach in the USA. Consequently, any negative disclosure not mandated by regulators conveys credible information about a firm’s prospects.
Design/methodology/approach: this paper uses a sample of UK FTSE all-share non-financial companies from 2010 to 2019. The authors use the textual-analysis approach based on Loughran and McDonald (2011)’s wordlist (LM) to measure the negative tone in UK annual reports.
Findings: the results show a significant negative association between negative tone and future performance. Moreover, our further analyses suggest that only the negativity in the executive section of the annual disclosures correlates significantly with future performance. In summary, this study suggests that negativity does matter under the principle-based approach and can be used as an indicator of future performance
Originality/value: in contrast to the literature arguing that only positivity has the power to affect a firm’s outcomes under the principle-based approach, the authors provide new empirical evidence suggesting that negativity also matters within the UK context and can be used as an indicator for future performance. Also, to the best of the authors’ knowledge, this is the first study to identify which section of the annual report is more informative about a firm’s future performance.
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Accepted Manuscript
- Accepted Manuscript
More information
Accepted/In Press date: 5 November 2023
e-pub ahead of print date: 30 November 2023
Keywords:
Firm performance, Narrative disclosure, Negativity, Textual-analysis, United Kingdom
Identifiers
Local EPrints ID: 485740
URI: http://eprints.soton.ac.uk/id/eprint/485740
ISSN: 1834-7649
PURE UUID: b410eda7-ab53-4d79-b013-02203edd03b0
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Date deposited: 18 Dec 2023 20:28
Last modified: 18 Mar 2024 04:06
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Contributors
Author:
Hesham Bassyouny
Author:
Michael Machokoto
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