Narrative disclosure and earnings quality: what is the nexus? Evidence from emerging countries

Abstract

PurposeNarrative disclosures offer further elucidation of a company's financial performance beyond what is presented in numerical format. This can assist stakeholders in gaining a deeper comprehension of the elements that impact reported earnings, thereby improving the quality of financial information. The current research explores the impact of narrative disclosure on the earnings quality of firms listed on the Amman Stock Exchange (ASE).Design/methodology/approachAppropriating an index to measure the narrative disclosure level in the research sample firms, the research utilizes an analysis of the textual content of nonfinancial reports and statements issued by the management of the ASE-listed nonfinancial firms between 2013 and 2022. The financial statements issued in the annual financial reports are also adopted to extract data on earnings quality and the controlling variables. The analysis of the data and attainment of the findings necessitate using the panel data.FindingsIt is indicated that narrative disclosure affects earnings quality. To be precise, the greater the narrative disclosure, the lower the absolute value of the voluntary discretionary accruals and thus the higher the quality of accounting earnings.Research limitations/implicationsThe findings contribute to new research on disclosure issues, particularly narrative disclosure, which enhances reader confidence in financial and nonfinancial reports and prevents misleading and manipulated information.Originality/valueThis research helps decision-makers understand the relationship between reports, statements and earnings quality in a firm. It's unique in exploring this relationship, especially in developing countries. The study is the first of its kind in Jordan, known for its economic stability and strategic location in the Middle East, making its findings applicable to similar environments.