Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

Hesham Bassyouny and Michael Machokoto

International Journal of Accounting & Information Management, 2023, vol. 32, issue 2, 207-227

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.

Keywords: Negativity; Narrative disclosure; Firm performance; Textual-analysis; United Kingdom; M40; M41; G34 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:ijaim-01-2023-0001

DOI: 10.1108/IJAIM-01-2023-0001

Access Statistics for this article

International Journal of Accounting & Information Management is currently edited by Dr Xin (Robert) Luo and Professor Han Donker

More articles in International Journal of Accounting & Information Management from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().