Narrative Reporting: State of the Art and Future Challenges

Abstract

Narrative reporting, both in relation to financial and non-financial information, is increasingly used and often mandated, with significant managerial discretion regarding content. As policy makers consider reporting as a tool for regulation to steer the behaviour of companies towards improving practices and performance upon which they have to disclose, the aim of this paper is to provide the state of the art in the academic literature on narrative reporting and identify future challenges. In order to do so, the paper investigates three questions: (1) How has the quality of narrative reporting been defined? (2) What narrative information is required and used by various stakeholders? (3) What are the real effects of narrative reporting? In answering these three questions, our review also gives implications for both future academic research and policy makers.

Keywords:

• narrative reporting
• corporate disclosure
• impression management
• stakeholder engagement
• accountability

Acknowledgements

The authors gratefully acknowledge comments made by the two anonymous reviewers and guest editors, as well as participants at the 2021 FARSIG Symposium. The article is based on a broader independent literature review commissioned by the Financial Reporting Council (2019–2020). The authors are particularly grateful to Yasmine Chahed, James Perry and Helen Grimshaw for their invaluable support and suggestions.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.frc.org.uk/news/october-2018/frc-to-examine-the-future-of-corporate-reporting.

2 Appendix A reports the details of the methodology used in the original survey. (Michelon, Trojanowski, et al., 2020)

3 Beattie (2014) notes that while the European research tradition refers to the term ‘narrative’ reporting, the literature developed in North America mostly refers to ‘voluntary disclosure’. There are instances where the two terms do not coincide, in that narratives can also be prepared within a mandatory regime. However, we note that mandates do not prescribe the content of reporting, and hence narratives remain discretionary in essence. In this paper, we use the term narrative and disclosure interchangeably.

4 Investors include all capital providers, i.e., equity capital (shareholders) and debt capital (creditors), whether actual or potential.

5 The debate about to whom the firm is held accountable is not independent from the legal frame that defines the fiduciary duties of directors. While this debate is beyond the scope of this review, recent research argues that shareholder primacy is not a legal requirement of fiduciary duties in most countries, the US being an exception (Eccles & Youmans, 2015). The literature review prepared for the FRC, however, suggests financial accounting regulators, potentially influenced by academics, have morphed corporate reporting towards a shareholder primacy perspective and away from, for example, the original intent expressed in The Corporate Report, released by the Accounting Standards Steering Committee in 1975 (ASSC, 1975).

6 For a complete overview of the status of the literature on linguistic analysis of corporate reporting, refer to the following literature reviews: Hassan and Marston (2019), Jones and Shoemaker (1994), Lewis and Young (2019), Li (2010), Loughran and McDonald (2016). Moreover, Smith and Taffler (1992) provide an extensive analysis stressing the difference between ‘readability’ and ‘understandability’ of accounting narratives.

7 This paper considers senior management personalities and captures the subtle messages conveyed by narratives, beyond tone and readability.

8 This literature focuses on textual analysis of annual report disclosure, whether broadly (Dyer et al., 2017; Lang & Stice-Lawrence, 2015) or in relation to specific items, such as risk disclosures (Hope et al., 2016; Kravet & Muslu, 2013). While these studies do not explicitly refer to the term ‘impression management’, they still explore ideas of managerial opportunism in management narratives, and therefore are included here under the impression management umbrella.

9 Roberts (2018) provides a critique about the lack of engagement that this most recent literature has shown with other school of thoughts, and the perils of misinterpretation of findings in light of this lack of engagement.

10 The GRI framework recommends stakeholder engagement in the definition of what issues are material for reporting. In other words, it recommends that stakeholders have a say on the issues and topics they wish to see discussed in a sustainability report. This is in contrast to the approach adopted by the SASB, where issues are ex-ante defined as material in terms of their potential impact on capital markets.

11 Given the nascent state of the field, the methodological debate on the merits of various methodological approaches is ongoing (Henry & Leone, 2016; Lewis & Young, 2019; Loughran & McDonald, 2011).

12 For a review of the literature on the role of the MD&A, see Cole and Jones (2015).

13 E.g. reporting on firms’ accounting policies (Hope, 2003).

14 Lee et al. (2018) measure the value of analysts’ recommendation revisions indirectly by examining abnormal stock returns around the date when the revisions are issued.

15 The results in Dhaliwal et al. (2012) should however be interpreted with caution, given that they use a rough proxy for CSR reporting (i.e., the presence or absence of a CSR report).

16 Creditors, who are another group of capital providers besides shareholders, play a particularly important role, distinct from that played by other stakeholders. Hence, we review the literatures on creditors and other stakeholders separately in Sections 3.3 and 3.4, respectively.

17 Aspects of the usage of corporate reporting by regulators, standard setters, and auditors are outside of the scope of this review.

18 Importantly, our literature search only identified studies focusing on the usage of non-financial or integrated reporting rather than of narrative financial reporting by stakeholders.

19 In some cases, conflicting pressures from various stakeholder groups may result in firms tending to adopt ad-hoc reporting strategies for different stakeholders, pretending to be addressing their respective concerns (Cho, Laine, et al., 2015).

20 Engagement of stakeholders in the corporate reporting process discussed here is of a different nature than that discussed in the context of their production of counter-accounts. Here we refer to stakeholders being engaged in the preparation of the company’s own reporting information.

21 See for example the following projects, all of which are challenging these shareholder primacy notions: The Purpose of the Corporation (http://purposeofcorporation.org/), The Modern Corporation: Corporate Governance for the twenty-first century (http://themoderncorporation.org) and the Future of the Corporation (https://www.thebritishacademy.ac.uk/future-corporation) [all websites accessed on 10 December 2020]. We also note that the recent Discussion Paper released by the Financial Reporting Council embeds a notion of network, objective-driven reporting.

22 Keywords list: financial report/disclosure; corporate report/disclosure; annual report; financial statement; corporate governance statement; remuneration report; earnings announcement/preliminary announcement; risk report/disclosure; voluntary report/disclosure; mandatory report/disclosure; narrative information/disclosure/reporting; strategic report; MD&A/management discussion and analysis; non-financial report/disclosure; corporate social responsibility/CSR report/disclosure/assurance; sustainability report/disclosure/assurance; social/environmental/governance report/disclosure/assurance; integrated report; stakeholder engagement/dialogue.

Additional information

Funding

This work was supported by the Financial Reporting Council 2019–2020.