Top

Review of Quantitative Finance and Accounting

Published in:

08-03-2018 | Original Research

Do forward-looking narratives affect investors’ valuation of UK FTSE all-shares firms?

Authors: Ahmed Hassanein, Alaa Zalata, Khaled Hussainey

Published in: Review of Quantitative Finance and Accounting | Issue 2/2019

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

Narrative reporting is an important avenue for investors to know more about a company from the eyes of its board of directors. This study aims to examine the impact of forward-looking disclosures on the values of UK FTSE all-shares non-financial firms. It uses a sample of annual report narratives from 2005 to 2014 to determine that the values of UK FTSE all-shares firms are positively influenced by the disclosure of forward-looking information. Besides, after distinguishing between high and low-performing firms, the study finds that forward-looking disclosures have no effect on the values of high-performing firms, though they positively enhance investors’ valuation of low-performing firms. Furthermore, the study concludes that when UK firms are divided based on the size of the audit firm (Big 4 vs. non-Big 4 auditors), forward-looking disclosures only positively affect the values of FTSE all-shares firms that are audited by one of the Big 4 auditing firms. Therefore, the results suggest that forward-looking information in UK narrative reporting statements is seen as credible for firms that are audited by a large auditor and/or are low-performing.

previous article On corporate financial distress prediction: What can we learn from private firms in a developing economy? Evidence from Greece

next article Management’s personal ideology and financial reporting quality

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

Throughout the current study, the terms narrative reporting, narrative disclosure, narrative statements, and narratives are used interchangeably.

We use annual reports annual reports since external investors still perceive them to be an influential and credible source of information (e.g., Beattie et al. 2004). In addition, we utilize annual reports rather than interim reports to avoid seasonality and updates of originally reported interim data.

The values of Tobin’s Q are widely varying across different industries due to differences in the operating nature of industries across the sample firms (Bebchuk et al. 2009). The industry median adjusted Tobin’s Q controls for variations among different industries which reduces potential bias resulting from differences in industries. Besides, this industry median Tobin’s Q reduces the variation between firms within the same industry which controls for unobserved firm-specific heterogeneity issues and cancels any firm fixed effects. This provides a consistent estimate of the residual in the endogenous variable (e.g., firm value). Consequently, the associations hold thereafter cannot be attributable to any endogeneity issues.

ASB (2005) The operating and financial review. reporting standard (RS1). ASB Publications, London

ASB (2006) The operating and financial review. Reporting statement. ASB Publications, London

Athanasakou V, Hussainey K (2014) The perceived credibility of forward-looking performance disclosures. Account Bus Res 44(3):227–259CrossRef

Ball R, Jayaraman S, Shivakumar L (2012) Audited financial reporting and voluntary disclosure as complements: a test of the confirmation hypothesis. J Account Econ 53(1–2):136–166CrossRef

Barako DG, Hancock P, Izan HY (2006) Factors influencing voluntary corporate disclosure by Kenyan companies. Corp Gov 14(2):418–431CrossRef

Barth M, Konchitchki Y, Landsman W (2013) Cost of capital and earnings transparency. J Account Econ 55:206–224CrossRef

Beattie V, Mcinnes B, Fearnley S (2004) A methodology for analysing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes. Account Forum 28:205–236CrossRef

Bebchuk LA, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financ Stud 22(2):783–827CrossRef

Botosan CA, Plumlee MA (2002) A re-examination of disclosure level and the expected cost of equity capital. J Account Res 40(1):21–40CrossRef

Bowman EH (1984) Content analysis of annual reports for corporate strategy and risk. Interfaces 14(1):61–71CrossRef

Brown LD, Caylor ML (2006) Corporate governance and firm valuation. J Account Public Policy 25(4):409–434CrossRef

Brown S, Tucker J (2011) Large-sample evidence on firms’ year-over-year MD&A modifications. J Account Res 49(2):309–345CrossRef

Brown S, Hillegeist S, Lo K (2009) The effect of earnings surprises on information asymmetry. J Account Econ 47:208–222CrossRef

Chenhall RH, Moers F (2007) The issue of endogeneity within theory-based, quantitative management accounting research. Eur Account Rev 16(1):173–195CrossRef

Chin C, Lee P, Chi H, Anandarajan A (2006) Patent Citation, R&D Spillover, and Tobin’s Q: Evidence from Taiwan Semiconductor Industry. Rev Quant Financ Account 26(1):67–84CrossRef

Clatworthy M, Pong C, Wong W (2012) Auditor quality effects on the relationship between accruals, cash flows and equity returns: a variance decomposition analysis. Account Bus Res 42:419–440CrossRef

Dhaliwal DS, Li OZ, Tsang A, Yang YG (2011) Voluntary nonfinancial disclosure and the cost of equity capital: the initiation of corporate social responsibility reporting. Account Rev 86(1):59–100CrossRef

Elzahar H, Hussainey K, Mazzi F, Tsalavoutas I (2015) Economic consequences of key performance indicators’ disclosure quality. Int Rev Financ Anal 39:96–112CrossRef

Fan J, Wong TJ (2005) Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. J Account Res 43:35–72CrossRef

Feldman R, Govindaraj S, Livnat J, Segal B (2010) Management’s tone change, post earnings announcement drift and accruals. Rev Account Stud 15:915–953CrossRef

Gelb DS, Zarowin P (2002) Corporate disclosure policy and the informativeness of stock prices. Rev Account Stud 7(1):33–52CrossRef

Gow I, Ormazabal G, Taylor D (2010) Correcting for cross-sectional and time-series dependence in accounting research. Account Rev 85(2):483–512CrossRef

Gujarati DN, Porter DC (2009) Basic econometrics, 5th edn. McGraw Hill, New York

Guo Z, Chan K, Xue Y (2016) The impact of corporate culture disclosure on performance: a quantitative approach. Rev Pac Basin Financ Mark Policies 19(2):1–29

Hassan O, Romilly P, Giorgioni G, Power D (2009) The value relevance of disclosure: evidence from the emerging capital market of Egypt. Int J Account 44:79–102CrossRef

Hassanein A, Hussainey H (2015) Is forward-looking financial disclosure really informative? Evidence from UK narrative statements. Int Rev Financ Anal 41:52–61CrossRef

Hayn C (1995) The information content of losses. J Account Econ 202:125–153CrossRef

Healy PM, Hutton A, Palepu KG (1999) Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemp Account Res 16(3):485–520CrossRef

Henry D (2008) Corporate governance structure and the valuation of Australian firms: is there value in ticking the boxes? J Bus Finance Account 35(7–8):912–942CrossRef

Hussainey K (2009) The impact of audit quality on earnings predictability. Manag Audit J 24(4):340–351CrossRef

Hussainey K, Schleicher T, Walker M (2003) Undertaking large-scale disclosure studies when AIMR-FAF ratings are not available: the case of prices leading earnings. Account Bus Res 33(4):275–294CrossRef

IFRS (2010) Practice statement, MC, A framework for presentation. International Financial Reporting Standard, London, UK

Jensen M (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76(2):323–329

Lam SS, Du J (2004) Information asymmetry and estimation risk: preliminary evidence from Chinese equity markets. Pac Basin Finance J 12:311–331CrossRef

Larcker D, Rusticus T (2010) On the use of instrumental variables in accounting research. J Account Econ 49(3):186–205CrossRef

Lawrence A, Minutti-Meza M, Zhang P (2011) Can big 4 versus non-big 4 differences in audit quality proxies be attributed to client characteristics? Account Rev 86(1):259–286CrossRef

Leung S, Horwitz B (2010) Corporate governance and firm value during a financial crisis. Rev Quant Financ Account 34(4):459–481CrossRef

Li F (2010) The information content of forward-looking statements in corporate filings—a Naıve Bayesian Machine learning approach. J Account Res 48(5):1049–1102CrossRef

Li X, Yang H (2016) Mandatory financial reporting and voluntary disclosure: the effect of mandatory IFRS adoption on management forecasts. Account Rev 91(3):933–953CrossRef

Liu C, Uchida K, Yang Y (2012) Corporate governance and firm value during the global financial crisis: evidence from China. Int Rev Financ Anal 21:70–80CrossRef

Mangena M, Tauringana V, Chamisa E (2012) Corporate boards, ownership structure and firm performance in an environment of severe political and economic crisis. Br J Manag 23(S1):23–41CrossRef

Mangena M, Li J, Tauringana V (2016) Disentangling the effects of corporate disclosure on the cost of equity capital: a study of the role of intellectual capital disclosure. J Account Audit Finance 31(1):3–27CrossRef

Merkley K (2014) Narrative disclosure and earnings performance: evidence from R&D. The Accounting Review 89(2):725–757CrossRef

Michelson SE, Jordan-Wagner J, Wootton CW (1995) A market based analysis of income smoothing. J Bus Finance Account 22(8):1179–1193CrossRef

Miller G (2002) Earnings performance and discretionary disclosure. J Account Res 40:173–204CrossRef

Miller B (2010) The effects of reporting complexity on small and large investor trading. Account Rev 85(6):2107–2143CrossRef

Muslu V, Radhakrishnan S, Subramanyam KR, Lim D (2015) Forward-looking MD&A disclosures and the information environment. Manage Sci 61:931–948CrossRef

Ntim C, Opong K, Danbolt J (2012) The relative value relevance of shareholder versus stakeholder corporate governance disclosure policy reform in South Africa. Corp Gov Int Rev 20(1):84–105CrossRef

Officer M (2011) Overinvestment, corporate governance, and dividend initiations. J Corp Finance 17(3):710–724CrossRef

Patel SA, Balic A, Bwakira L (2002) Measuring transparency and disclosure at firm level in emerging markets. Emerg Mark Rev 3(4):325–337CrossRef

Petersen MA (2009) Estimating standard errors in finance panel data sets: comparing approaches. Rev Financ Stud 22:435–479CrossRef

Plumlee M, Brown D, Hayes R, Marshall S (2015) Voluntary environmental disclosure quality and firm value: further evidence. J Account Public Policy 34(4):336–361CrossRef

Rasiah D, Tong D, Kim P (2014) Profitability and firm size-growth relationship in construction companies in Malaysia from 2003 to 2010. Rev Pac Basin Financ Mark Policies 17(3):1–19CrossRef

Rountree B, Weston JP, Allayannis G (2008) Do investors value smooth performance? J Financ Econ 90(3):237–251CrossRef

Schleicher T, Hussainey K, Walker M (2007) Loss firms’ annual report narratives and share price anticipation of earnings. Br Account Rev 39(2):153–171CrossRef

Smith M, Taffler R (2000) The chairman’s statement: a content analysis of discretionary narrative disclosures. Account Audit Account J 13(5):624–646CrossRef

Tabachnick B, Fidell L (2007) Using multivariate statistics, 5th edn. Pearson Education Inc., London

Van Buskirk A (2012) Disclosure frequency and information asymmetry. Rev Quant Financ Account 38(4):411–440CrossRef

Wallace RSO, Naser K (1995) Firm-specific determinants of comprehensiveness of mandatory disclosure in the corporate annual reports of firms listed on the stock exchange of Hong Kong. J Account Public Policy 14(4):311–368CrossRef

Wang M, Hussainey K (2013) Voluntary forward-looking statements driven by corporate governance and their value relevance. J Account Public Policy 32:26–49CrossRef

Zhang L, Ding S (2006) The effect of increased disclosure on cost of capital: Evidence from China. Rev Quant Financ Account 27(4):383–401CrossRef

Title: Do forward-looking narratives affect investors’ valuation of UK FTSE all-shares firms?
Authors: Ahmed Hassanein
Alaa Zalata
Khaled Hussainey
Publication date: 08-03-2018
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 2/2019
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-018-0717-6

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 2/2019

Management’s personal ideology and financial reporting quality

Fee competition among Big 4 auditors and audit quality

On corporate financial distress prediction: What can we learn from private firms in a developing economy? Evidence from Greece

Effects of tuition discounting on university’s financial performance

CEO power, board oversight, and earnings announcement tone

Semi-parametric real exchange rates dynamics