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

Bassyouny, Hesham; Abdelfattah, Tarek

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.

Citation

Bassyouny, H., & Abdelfattah, T. (2022). Executives vs. governance: Who has the predictive power? Evidence from narrative tone. Review of Quantitative Finance and Accounting, 58(1), 361-382. https://doi.org/10.1007/s11156-021-00997-y

• Journal Article Type: Article
• Acceptance Date: Jun 11, 2021
• Online Publication Date: Jun 18, 2021
• Publication Date: 2022-01
• Deposit Date: Nov 14, 2022
• Publicly Available Date: Nov 29, 2022
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Issue: 1
• Pages: 361-382
• DOI: https://doi.org/10.1007/s11156-021-00997-y
• Keywords: Finance; General Business, Management and Accounting; Accounting
• Public URL: https://nottingham-repository.worktribe.com/output/13740908
• Publisher URL: https://link.springer.com/article/10.1007/s11156-021-00997-y