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

Author

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  • Hesham Bassyouny

    (University of Northampton
    Alexandria University)

  • Tarek Abdelfattah

    (University of Portsmouth
    Mansoura University)

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.

Suggested Citation

  • Hesham Bassyouny & Tarek Abdelfattah, 2022. "Executives vs. governance: Who has the predictive power? Evidence from narrative tone," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 361-382, January.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:1:d:10.1007_s11156-021-00997-y
    DOI: 10.1007/s11156-021-00997-y
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    References listed on IDEAS

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    Cited by:

    1. Elshandidy, Tamer & Kamel, Hany, 2024. "Tone of narrative disclosures and earnings management: UK evidence," Advances in accounting, Elsevier, vol. 64(C).
    2. Mushtaq, Rizwan & Gull, Ammar Ali & Shahab, Yasir & Derouiche, Imen, 2022. "Do financial performance indicators predict 10-K text sentiments? An application of artificial intelligence," Research in International Business and Finance, Elsevier, vol. 61(C).
    3. Bassyouny, Hesham & Abdelfattah, Tarek & Tao, Lei, 2022. "Narrative disclosure tone: A review and areas for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Narrative reporting; Tone predictive power; Textual analysis; Executives; Governance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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