Abstract

This study investigates the narratives risk disclosures of the four British financial institutions that were adversely affected during the 2008 banking crisis. This investigation uses content analysis with the aid of Concordance software to explore the risk disclosure of these companies for the period 1998-2008. Risk disclosures in the Business Review sections of the annual reports of the banks were analysed into their historic and forward looking contents, and current firm performance was measured with respect to earnings per share (EPS) and dividend, while future performance was measured by growth in EPS, and positive time lag in EPS.

Consistent with its predictions, the study found a significant negative relationship between the extent of historic narrative disclosures and current and future firm performance, and a significant positive relationship between forward looking narrative risk disclosures and both current and future firm performance. Additional analysis shows that optimistic and pessimistic narrative risk disclosures are not significant in explaining current and future firm performance for these firms.

Findings from this study are important for users of the financial statements and regulators because they highlight an opportunity to detect warning signals for companies at risk of collapse. The study adds to the growing number of empirical investigations that provide alternative approaches to understanding business failures.

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