Are Words Beneficial to the Consumption of Numbers in Financial Reports?
54 Pages Posted: 19 May 2020 Last revised: 17 Aug 2022
Date Written: August 17, 2022
We propose that narratives in financial disclosures are used to complement, expand upon, and provide context to numerical disclosures. We define narrativization as the proportion of words to numbers in specific disclosures and examine whether greater narrativization contributes to disclosure quality. We focus on disclosures in three inherently complicated footnotes and the Management Discussion and Analysis (MD&A) in annual filings. Using comment letters (CLs) to capture regulators’ perspectives of disclosure deficiencies, we find that the narrativization in each disclosure is associated with a lower likelihood of receiving a CL related to the topic of that disclosure. We further find that the narrativization of the MD&A is associated with lower analyst forecast errors, a stronger market reaction, and greater liquidity. These results suggest that the use of more words to explain numbers in financial reports reduces the likelihood of regulators’ intervention and increases the usefulness of disclosures for analysts and investors. Hence, companies should consider including sufficient narratives to explain numerical information.
Keywords: Narrativization, textual analysis, disclosure quality, disclosure complexity, XBRL, financial statement footnotes, management discussion and analysis
JEL Classification: N20, M40, M41, G18, G28
Suggested Citation: Suggested Citation