Impression Management and Annual Report Narratives: The Effects of Internal and External Control Mechanisms in a Non-Anglo-Saxon Context

Abstract

This study extends impression management literature by testing whether internal control mechanisms and other external control mechanisms are effective in controlling potentially misleading disclosure in management reporting.

Because agency conflicts depend on environmental settings, impression management mechanisms can differ among countries. This study enlarges previous evidence by focusing on non-Anglo-Saxon countries. Italy is worth studying due to the similarities that Italian institutional environment shows with many other countries, at least in Continental Europe. Moreover, management reporting disclosure in Italy is essentially voluntary and potentially highly discretional.

I develop a composite measure of disclosure bias, based on four different techniques of impression management, to assess the level of misleading disclosure included in the area of management reporting devoted to the analysis of firm performance. The findings, based on a sample of Italian listed companies, confirm the presence of self-serving disclosure in management reporting. Additionally, I find that the proportion of independent directors and the degree of foreign activity are significantly and negatively correlated with disclosure bias scores. Relevant operative implications involving the quality of management reporting disclosure in non-Anglo-Saxon countries are discussed.

Keywords: disclosure quality, narrative disclosure, impression management, control mechanisms, corporate governance, management commentary

JEL Classification: G34, M40