Improving the decision usefulness of the corporate annual report
Shareholder surveys consistently demonstrate users' perceptions of the importance of annual report disclosures in the decision-making process and their readership of the Chairman's narrative. - Yet existing empirical evidence casts doubt on the informational content of any part of the annual report. This study offers a partial explanation of this anomaly by demonstrating the decision usefulness of annual report disclosures, focusing on improvements made possible by a more detailed analysis of the content and its presentation. The Chairman's narrative provides a voluntary disclosure acting as a vehicle for signalling the intentions of the executive, but also as an opportunity to convey information incremental to the financial statements. The absence of a shared meaning for accounting terms between the users and preparers of the, accounts provides a further opportunity for miscommunication. and misinformation. Such differences may be attributable to either the complexity of content or the complexity of presentation. Both are addressed in this study. With regard to content, the study examines the environmental predictability of the semantic content by constructing explanatory models of the financial performance of the enterprise. With regard to presentation, both the readability and cognisability of the narrative are evaluated with reference to the size and financial performance of the enterprise. The study concludes with an examination of alternative methods for the presentation of financial information, focusing on the use of schematic faces as a potentially unique format with specific portrayal advantages. The facial format is shown to be an efficient method of processing, producing decisions of comparable quality to those with financial statement information, and in a much shorter time. An approach is adopted which rectifies the deficiencies of earlier studies by incorporating the full force of the existing psychological evidence and by generating an optimum feature assignment experimentally.
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