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THE CHAIRMAN'S STATEMENT AND CORPORATE FINANCIAL PERFORMANCE
Author(s) -
Smith Malcolm,
Taffler Richard
Publication year - 1992
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1992.tb00187.x
Subject(s) - readability , narrative , clarity , excellence , sample (material) , market liquidity , accounting , financial statement , extant taxon , financial statement analysis , agency (philosophy) , business , performance measurement , finance , financial ratio , marketing , political science , computer science , sociology , linguistics , law , social science , philosophy , chemistry , biology , biochemistry , audit , chromatography , evolutionary biology , programming language
Agency theory and signalling theory both suggest that firms are motivated to disclose excellence of financial performance in an unambiguous manner. We might expect, therefore, that good financial performance is associated with a clear and readable Chairman's narrative and poor performance with an obscure or misleading message. Extant work linking corporate performance with clarity of executive narrative fails to distinguish sample cases by industry or financial status. This paper seeks to overcome the consequences of such deficiencies explicitly, by conducting a systematic analysis of the relationship between narrative complexity and alternative measures of financial performance, for a matched sample of failed/non‐failed companies across common industries. This study employs separate measures of the readability and the understandability of the chairman's narrative and finds them to be significantly related to overall financial performance and individual measures of performance, most notably liquidity. Poor readability is strongly associated with poor financial performance and ease of readability with relative financial success. The implication is that firms actively signal good news while obscuring, perhaps deliberately, messages which convey bad news.