Differential patterns of textual characteristics and company performance in the chairman's statement

Abstract

PurposeThe purpose of this paper is to assess the effect of financial performance on the textual characteristics of the chairman's statement. In particular, given the increased motives for poorly performing management to engage in impression management, the paper focuses on whether companies' reporting strategies depend on underlying financial performance.Design/methodology/approachThe research questions are investigated by examining a range of textual characteristics in the chairman's statements of 100 extremely profitable and extremely unprofitable UK listed companies.FindingsThe results in this paper indicate that the chairman's statement is subject to impression management techniques as managers' propensity to associate themselves with company financial results is associated with the firm's underlying financial performance. There is also some evidence that unprofitable companies focus more on the future, rather than on past performance.Research limitations/implicationsThe paper shows the results of this study are based on samples of extremely profitable or extremely unprofitable companies and thus represent the tails of the distribution; further research using random sampling could investigate the extent to which the findings hold for all companies. Additional factors, such as changes in board membership, could also be examined in future research.Practical implicationsThe research in this paper has implications for the current state of financial reporting whereby auditors do not formally audit, but instead review, the chairman's statement to ascertain its consistency with the financial statements.Originality/valueThe paper will be of value to academic researchers in the field of impression management and to users of annual reports who may rely on the chairman's statement for decision making.

Methodological Insights

“…Examples include Abrahamson and Park (1994), Abrahamson and Amir (1996), Clatworthy and Jones (2003) and Clatworthy and Jones (2006). Similar to some other content analysis techniques, there is a degree of subjectivity involved in this analysis, as it relies upon the classification of keywords into positive and negative categories.…”

Narrative Accounting Practices in Indonesia Companies

“…Similarly, Morrow (2005) saw only 14% out of 3.317 company with negative cases coded as weaknesses in MDA. Clatworthy and Jones (2006) agreed that the manager was more selective in the use of narrative in MDA.…”

“…In the context of the company's financial reporting, impression management is an effort to control and manipulate the impression conveyed to the accounting information users (Clatworthy & Jones, 2006). The manager is supposed to use company reports as a means of impression management to strategically manipulate the perceptions and decisions of stakeholders (Yekini, Wisniewski, & Millo, 2016).…”

Text mining to detect indications of fraud in annual reports worldwide

“…This tendency holds for companies with deteriorating performance as well as the ones with good results. In their follow up research Clatworthy and Jones (2006) found that the unprofitable companies use fewer personal references, more passive sentences, and focus more on the future in the chairman's statement compared to that by the profitable ones. Aerts (2005) further explores the internal cognitive and external processes that lead to impression management.…”

“…The research of Clatworthy and Jones (2006) showed that by analyzing the chairman's statements of the UK listed companies, profitable companies were more likely to quantify their performance in the text.…”