Studying the impact of profitability, bankruptcy risk, and pandemic on narrative tone in annual reports in an emerging market in the East

The purpose of this paper is to investigate whether the narrative tone of annual reports is influenced by profitability, bankruptcy risk, and pandemic in the context of Vietnam. The study applies the necessary regression analysis steps such as ordinary least squares (OLS), random effects model (REM), fixed effects model (FEM), and feasible generalized least squares (FGLS). Bootstrapping and System Generalized Method of Moments (SGMM) methods are used to test the robustness and address endogeneity and dynamic relationships in the data. The findings show that net tones increase while negative tones decrease in companies with high profitability. Companies at risk of bankruptcy use more negative tone and less net tone than companies that are not at risk of bankruptcy. The study also affirms that bankruptcy risk moderates the relationship between profitability and negative tone. During the COVID-19 pandemic, companies used more positive and negative tones than they did before the pandemic. After the COVID-19 situation stabilized, positive tones were used more, and negative tones were used less than during the outbreak. The research results also recognized that companies do not intend to hide information through impression management when faced with difficult economic conditions. This study has practical implications for investors and information users when considering management disclosures through the narrative tone of annual reports. To our knowledge, this is the first study (1) in an emerging market in the East—where there are fundamental cultural and linguistic differences compared to Western countries, (2) to build a list of Vietnamese words and phrases expressing emotional nuances used in finance and accounting, and (3) refers to the narrative tone of annual reports across different groups of companies.

Binh Thi Hai Le, Cong Van Nguyen