This study investigates the key factors that drive narrative tone in the UK context where managers have more flexibility to frame narratives with stakeholders. While prior studies examined firm-specific characteristics as determinants of Narrative Disclosure Tone (NDT), and the short-term effect on stock markets as consequences of NDT, the current study employs the upper echelons theory and focusses on top managers’ characteristics as key factors that drive NDT. Moreover, it examines not only narrative tone predictive power but also who has this power inside companies to help with predicting future performance. Using computerised textual analysis, the findings suggest that both observed and unobserved CEO characteristics drive positive tone in the UK context and this relationship is moderated by corporate governance attributes. Specifically, older, female and financial expert CEOs display less positive tone. Considering psychological features, the current study shows that narcissistic CEOs are more likely to display positive tone compared with non-narcissistic CEOs, however, this relationship declines in firms that have a higher independent board. Moreover, audit committee and board independence are negatively associated with positive tone. Additionally, the results show more females on board increases the negative relationship between female CEOs and positive tone. Considering tone predictive power, the current study found that corporate narrative tone is associated with future performance. However, answering the question about who has this power, the results show that an executive’s tone has the power to help with predicting a company’s future performance but not governance’s tone. Moreover, the current study shows that Financial Reporting Council guidance increases corporate narrative tone power in general and executive tone in particular in predicting future performance. Finally, the current research shows that negativity does matter in the UK context as it is significantly associated with future performance. These results have significant implications for top management, policy makers, regulators and the external users of financial reporting.
|Date of Award||Nov 2020|