Ebook Corporate governance and impression management in annual results press releases
Although the importance of press releases as part of a firm’s disclosure strategy is widely accepted (Lang and Lundholm 2000; Bushman and Smith 2001; Francis et al. 2002), academic research on this area has been limited. Press releases are easily accessible by the public and represent an important instrument for managers to communicate firm performance. However, through them, managers can influence the perceptions of third parties for their own benefit (Bowen et al. 2005). Oftentimes, managers provide self-serving disclosures that cast their performance in a positive light or that blame poor performance on temporary external factors (Barton & Mercer, 2005). In this paper, we analyse the role of internal corporate governance mechanisms in limiting self-serving disclosure practices by management in press releases.
Extant research provides mounting evidence of the monitoring and disciplining role of governance mechanisms, and highlights the role of boards of directors in facilitating and improving the control exerted over senior managers, ensuring that management acts in the interests of investors. Prior academic work confirms that efficient governance mechanisms limit earnings management practices (Dechow, Sloan & Sweeney, 1996; Peasnell, Pope & Young, 2005) demand more conservative accounting (Ahmed & Duellman, 2007) and increase voluntary disclosure in annual reports (Cheng & Courtenay, 2006; Lim, Matolcsy & Chow, 2007). However, while there is general agreement that governance influences accounting information quality, there is limited evidence on its association with voluntary disclosure practices, and no previous evidence on whether these mechanisms can influence impression management practices in narrative disclosures.
In the context of corporate reporting, we interpret that impression management occurs when management selects the information to release, and presents it in a way that distorts readers’ perceptions of corporate achievements (Neu, 1991; Neu, Warsame & Pedwell, 1998). We focus on one type of disclosure: the information contained in annual results press releases (ARPRs). These releases are issued once a year within the first quarter of the following fiscal year. In addition to other information, they normally include a summary of the financial annual results thus providing stakeholders with valuable information before the annual report is available. One important aspect of ARPRs is that their content is unregulated, allowing managers full discretion on what information to include and also providing them with a tool with greater potential for impression management and higher short-term flexibility than other more rigid publications, such as annual reports (Lang & Lundholm, 1993, p. 269).
The study is based on a sample of 106 Spanish firms. We manually collect all available ARPRs of Spanish quoted companies for the year 2000 and analyze them in search of potentially misleading disclosure practices. We also manually collect corporate governance data to build a score that aggregates several measures of the functioning and characteristics of the board of directors and its delegated committees. Using these data, we analyse the link between potentially misleading disclosure practices and the strength of firm corporate governance. To measure impression management we follow the method in Brennan et al. (2008): We create three composite scores that aggregate different techniques of managing impressions. These composite scores are used to develop a measure of bias that applies to both qualitative and quantitative information. Specifically, we consider: (i) thematic manipulation; (ii) emphasis; (iii) performance comparisons; and (iv) selectivity in ARPRs.
The results show that strong governance lowers the incidence of disclosure practices consistent with impression management. In particular, stricter monitoring by governance mechanism is associated with reduced impression management of qualitative (or narrative) information. The evidence regarding the use of quantitative disclosures to produce potentially misleading narratives, albeit weaker, corroborates the findings. Interestingly, our results show that a driver of impression management is current and forthcoming news. We show that impression management is strongly associated to current and future good news about the firm. This is consistent with managers making more optimistic disclosures when there are good news to report and when they expect good news in the following period. This would suggest that impression management in ARPRs is driven, at least partly, by informative motives.
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