Do Integrated Financial and Extra-Financial Narrative Disclosures in the Management Commentary Affect Firm Valuation? International Evidence

Abstract

We examine the association of integrated financial and extra-financial narrative disclosures in the management commentary section of corporate annual reports with firm valuation, as well as the moderating role of internal and external governance mechanisms in this association. Using 31,327 firm-year observations across 63 countries from 2003–2019, we find that integrated financial and extra-financial narrative disclosures in the management commentary are positively associated with firm valuation. This relationship is more pronounced for firms with better internal governance (corporate governance) and external governance (institutional investors’ ownership and analysts’ coverage) mechanisms. The study findings contribute to the debate on the relative costs and benefits of providing integrated financial and extra-financial narrative disclosures in the management commentary and have important implications for regulators, policy makers, investors, financial analysts, and company management throughout the world.

Keywords: Narrative disclosures, management commentary, firm valuation, institutional ownership, analyst coverage, cross-country

JEL Classification: G32, M40, M41