The predictive ability of corporate narrative disclosures: Australian evidence

Abstract

Purpose

The purpose of this paper is to investigate the relationship between narrative disclosures and corporate performance based on Australian evidence. In particular it builds a model which discriminates between good and poor performing companies based on their corporate narratives.

Design/methodology/approach

A sample of Australian manufacturing companies is classified into two groups based on earnings per share (EPS) movement between 2008 and 2009. A content analysis of their discretionary narrative disclosures is used to classify and predict group membership.

Findings

This study finds that the word‐based variables based on discretionary disclosures are significantly correlated with corporate performance. Word‐based variables can successfully classify companies between “good” performers and “poor” performers with an accuracy of 86 percent.

Research limitations/implications

The relatively small sample size, for Australian manufacturing companies, limits both the predictive ability of the model and its generalisability elsewhere.

Practical implications

The findings of the paper demonstrate that certain keywords, notably the use of “high/highest” and “dividends” are significantly and positively associated with superior performance.

Originality/value

The study builds a classification model for continuing Australian companies, whereas prior research focuses on UK and US companies and is based on a healthy/failed distinction.

Citation

Smith, M., Dong, Y. and Ren, Y. (2011), "The predictive ability of corporate narrative disclosures: Australian evidence", Asian Review of Accounting, Vol. 19 No. 2, pp. 157-170. https://doi.org/10.1108/13217341111181087