Advertisement

Review of Quantitative Finance and Accounting

, Volume 52, Issue 2, pp 493–519 | Cite as

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

  • Ahmed HassaneinEmail author
  • Alaa Zalata
  • Khaled Hussainey
Original Research

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.

Keywords

Narrative reporting Forward-looking information Firm value UK 

JEL Classification

M41 

Notes

Acknowledgements

We would like to thank Dear Prof. Cheng-few Lee (The Editor of Review of Quantitative Finance and Accounting) and the anonymous referee for helpful comments and suggestions. This paper has been benefited from comments and suggestions from the reviewer committees and participants at the British Accounting and Finance Association (BAFA) Conference at University of Bath (March, 2016), and the 39th European Accounting Association (EAA) Annual Congress at Maastricht University (May, 2016). Also, we would like to thank Professor Hassan Yazdifar (University of Salford, UK) for helping in language editing and proofreading of the manuscript.

References

  1. ASB (2005) The operating and financial review. reporting standard (RS1). ASB Publications, LondonGoogle Scholar
  2. ASB (2006) The operating and financial review. Reporting statement. ASB Publications, LondonGoogle Scholar
  3. Athanasakou V, Hussainey K (2014) The perceived credibility of forward-looking performance disclosures. Account Bus Res 44(3):227–259Google Scholar
  4. 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):136–166Google Scholar
  5. Barako DG, Hancock P, Izan HY (2006) Factors influencing voluntary corporate disclosure by Kenyan companies. Corp Gov 14(2):418–431Google Scholar
  6. Barth M, Konchitchki Y, Landsman W (2013) Cost of capital and earnings transparency. J Account Econ 55:206–224Google Scholar
  7. 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 28:205–236Google Scholar
  8. Bebchuk LA, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financ Stud 22(2):783–827Google Scholar
  9. Botosan CA, Plumlee MA (2002) A re-examination of disclosure level and the expected cost of equity capital. J Account Res 40(1):21–40Google Scholar
  10. Bowman EH (1984) Content analysis of annual reports for corporate strategy and risk. Interfaces 14(1):61–71Google Scholar
  11. Brown LD, Caylor ML (2006) Corporate governance and firm valuation. J Account Public Policy 25(4):409–434Google Scholar
  12. Brown S, Tucker J (2011) Large-sample evidence on firms’ year-over-year MD&A modifications. J Account Res 49(2):309–345Google Scholar
  13. Brown S, Hillegeist S, Lo K (2009) The effect of earnings surprises on information asymmetry. J Account Econ 47:208–222Google Scholar
  14. Chenhall RH, Moers F (2007) The issue of endogeneity within theory-based, quantitative management accounting research. Eur Account Rev 16(1):173–195Google Scholar
  15. 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):67–84Google Scholar
  16. 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 42:419–440Google Scholar
  17. 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):59–100Google Scholar
  18. Elzahar H, Hussainey K, Mazzi F, Tsalavoutas I (2015) Economic consequences of key performance indicators’ disclosure quality. Int Rev Financ Anal 39:96–112Google Scholar
  19. Fan J, Wong TJ (2005) Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. J Account Res 43:35–72Google Scholar
  20. Feldman R, Govindaraj S, Livnat J, Segal B (2010) Management’s tone change, post earnings announcement drift and accruals. Rev Account Stud 15:915–953Google Scholar
  21. Gelb DS, Zarowin P (2002) Corporate disclosure policy and the informativeness of stock prices. Rev Account Stud 7(1):33–52Google Scholar
  22. Gow I, Ormazabal G, Taylor D (2010) Correcting for cross-sectional and time-series dependence in accounting research. Account Rev 85(2):483–512Google Scholar
  23. Gujarati DN, Porter DC (2009) Basic econometrics, 5th edn. McGraw Hill, New YorkGoogle Scholar
  24. 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):1–29Google Scholar
  25. 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 44:79–102Google Scholar
  26. Hassanein A, Hussainey H (2015) Is forward-looking financial disclosure really informative? Evidence from UK narrative statements. Int Rev Financ Anal 41:52–61Google Scholar
  27. Hayn C (1995) The information content of losses. J Account Econ 202:125–153Google Scholar
  28. Healy PM, Hutton A, Palepu KG (1999) Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemp Account Res 16(3):485–520Google Scholar
  29. 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):912–942Google Scholar
  30. Hussainey K (2009) The impact of audit quality on earnings predictability. Manag Audit J 24(4):340–351Google Scholar
  31. 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):275–294Google Scholar
  32. IFRS (2010) Practice statement, MC, A framework for presentation. International Financial Reporting Standard, London, UKGoogle Scholar
  33. Jensen M (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76(2):323–329Google Scholar
  34. Lam SS, Du J (2004) Information asymmetry and estimation risk: preliminary evidence from Chinese equity markets. Pac Basin Finance J 12:311–331Google Scholar
  35. Larcker D, Rusticus T (2010) On the use of instrumental variables in accounting research. J Account Econ 49(3):186–205Google Scholar
  36. 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):259–286Google Scholar
  37. Leung S, Horwitz B (2010) Corporate governance and firm value during a financial crisis. Rev Quant Financ Account 34(4):459–481Google Scholar
  38. Li F (2010) The information content of forward-looking statements in corporate filings—a Naıve Bayesian Machine learning approach. J Account Res 48(5):1049–1102Google Scholar
  39. Li X, Yang H (2016) Mandatory financial reporting and voluntary disclosure: the effect of mandatory IFRS adoption on management forecasts. Account Rev 91(3):933–953Google Scholar
  40. Liu C, Uchida K, Yang Y (2012) Corporate governance and firm value during the global financial crisis: evidence from China. Int Rev Financ Anal 21:70–80Google Scholar
  41. 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):23–41Google Scholar
  42. 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):3–27Google Scholar
  43. Merkley K (2014) Narrative disclosure and earnings performance: evidence from R&D. The Accounting Review 89(2):725–757Google Scholar
  44. Michelson SE, Jordan-Wagner J, Wootton CW (1995) A market based analysis of income smoothing. J Bus Finance Account 22(8):1179–1193Google Scholar
  45. Miller G (2002) Earnings performance and discretionary disclosure. J Account Res 40:173–204Google Scholar
  46. Miller B (2010) The effects of reporting complexity on small and large investor trading. Account Rev 85(6):2107–2143Google Scholar
  47. Muslu V, Radhakrishnan S, Subramanyam KR, Lim D (2015) Forward-looking MD&A disclosures and the information environment. Manage Sci 61:931–948Google Scholar
  48. 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):84–105Google Scholar
  49. Officer M (2011) Overinvestment, corporate governance, and dividend initiations. J Corp Finance 17(3):710–724Google Scholar
  50. Patel SA, Balic A, Bwakira L (2002) Measuring transparency and disclosure at firm level in emerging markets. Emerg Mark Rev 3(4):325–337Google Scholar
  51. Petersen MA (2009) Estimating standard errors in finance panel data sets: comparing approaches. Rev Financ Stud 22:435–479Google Scholar
  52. Plumlee M, Brown D, Hayes R, Marshall S (2015) Voluntary environmental disclosure quality and firm value: further evidence. J Account Public Policy 34(4):336–361Google Scholar
  53. 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):1–19Google Scholar
  54. Rountree B, Weston JP, Allayannis G (2008) Do investors value smooth performance? J Financ Econ 90(3):237–251Google Scholar
  55. Schleicher T, Hussainey K, Walker M (2007) Loss firms’ annual report narratives and share price anticipation of earnings. Br Account Rev 39(2):153–171Google Scholar
  56. Smith M, Taffler R (2000) The chairman’s statement: a content analysis of discretionary narrative disclosures. Account Audit Account J 13(5):624–646Google Scholar
  57. Tabachnick B, Fidell L (2007) Using multivariate statistics, 5th edn. Pearson Education Inc., LondonGoogle Scholar
  58. Van Buskirk A (2012) Disclosure frequency and information asymmetry. Rev Quant Financ Account 38(4):411–440Google Scholar
  59. 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):311–368Google Scholar
  60. Wang M, Hussainey K (2013) Voluntary forward-looking statements driven by corporate governance and their value relevance. J Account Public Policy 32:26–49Google Scholar
  61. Zhang L, Ding S (2006) The effect of increased disclosure on cost of capital: Evidence from China. Rev Quant Financ Account 27(4):383–401Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Ahmed Hassanein
    • 1
    • 2
    Email author
  • Alaa Zalata
    • 2
    • 3
  • Khaled Hussainey
    • 4
  1. 1.Gulf University for Science and Technology (GUST)West MishrefKuwait
  2. 2.Mansoura UniversityMansouraEgypt
  3. 3.University of SouthamptonSouthamptonUK
  4. 4.University of PortsmouthPortsmouthUK

Personalised recommendations