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The Information Content of Management’s Prospective Comments in Financially Distressed Companies: A Note

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  • El’Fred Boo
  • Roger Simnett

Abstract

Prior research revealed management’s prospective comments (MPCs) in annual reports to be informative with respect to companies’ future performance. As the finding was derived from analyses of random samples of companies, it is not known whether it is generalizable to companies that are experiencing financial distress. This study investigates whether disclosure of MPCs in the annual reports of companies experiencing financial distress is informative with regard to their future viability. The MPCs of 140 Australian public companies that had experienced significant losses were identified and then categorized as optimistic, pessimistic, mixed or no MPCs. Results from logistic regression analysis indicate that such MPCs provided information incremental to that contained in historical financial information about companies’ future viability. It was also found that, while companies that did not disclose any MPCs were more likely to fail than companies that disclosed optimistic MPCs, they were as likely to fail as companies that disclosed pessimistic or mixed MPCs. This suggests that financially distressed companies avoid disclosing MPCs in the absence of an optimistic outlook, a finding that supports Darrough and Stoughton’s (1990) theory of selective disclosure.

Suggested Citation

  • El’Fred Boo & Roger Simnett, 2002. "The Information Content of Management’s Prospective Comments in Financially Distressed Companies: A Note," Abacus, Accounting Foundation, University of Sydney, vol. 38(2), pages 280-295, June.
    • Handle: RePEc:bla:abacus:v:38:y:2002:i:2:p:280-295
    DOI: 10.1111/1467-6281.00109
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    Cited by:

    1. Bruynseels, Liesbeth & Willekens, Marleen, 2012. "The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies," Accounting, Organizations and Society, Elsevier, vol. 37(4), pages 223-241.
    2. Elsayed, Mohamed & Elshandidy, Tamer, 2020. "Do narrative-related disclosures predict corporate failure? Evidence from UK non-financial publicly quoted firms," International Review of Financial Analysis, Elsevier, vol. 71(C).
    3. Leung, Sidney & Parker, Lee & Courtis, John, 2015. "Impression management through minimal narrative disclosure in annual reports," The British Accounting Review, Elsevier, vol. 47(3), pages 275-289.
    4. Elizabeth Carson & Neil Fargher & Yuyu Zhang, 2016. "Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research," Australian Accounting Review, CPA Australia, vol. 26(3), pages 226-242, September.
    5. Ingrid E. Fisher & Margaret R. Garnsey & Mark E. Hughes, 2016. "Natural Language Processing in Accounting, Auditing and Finance: A Synthesis of the Literature with a Roadmap for Future Research," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 23(3), pages 157-214, July.
    6. G. Meeks & J. G. Meeks, 2009. "Self‐Fulfilling Prophecies of Failure: The Endogenous Balance Sheets of Distressed Companies," Abacus, Accounting Foundation, University of Sydney, vol. 45(1), pages 22-43, March.

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