Simone Aresu

Does graphical reporting improve risk disclosure? Evidence from European banks

Purpose The purpose of this paper is to examine the voluntary disclosure of risk-related issues, with a focus on credit risk, in graphical reporting for listed banks in the major European economies. It aims to understand if banks portray credit risk-related information in graphs accurately and whether these graphs provide incremental, rather than replicative, information. It also investigates whether credit risk-related graphs provide a fair representation of risk performance or a more favourable impression than is warranted. Design/methodology/approach A graphical accuracy index was constructed. Incremental information was measured. A multi-level linear model investigated whether credit risk affects the quantity and quality of graphical credit risk disclosure. Findings Banks used credit risk graphs to provide incremental information. They were also selective, with riskier banks less likely to use risk graphs. Banks were accurate in their graphical reporting, particularly those with high levels of credit risk. These findings can be explained within an impression management perspective taking human cognitive biases into account. Preparers of risk graphs seem to prefer selective omission over obfuscation via inaccuracy. This probably reflects the fact that individuals, and by implication annual report’s users, generally judge the provision of inaccurate information more harshly than the omission of unfavourable information. Research limitations/implications This study provides theoretical insights by pointing out the limitations of a purely economics-based agency theory approach to impression management. Practical implications The study suggests annual reports’ readers need to be careful about subtle forms of impression management, such as those exploiting their cognitive bias. Regulatory and professional bodies should develop guidelines to ensure neutral and comparable graphical disclosure. Originality/value This study provides a substantive alternative to the predominant economic perspective on impression management in corporate reporting, by incorporating a psychological perspective taking human cognitive biases into account.

Impression Management and Retrospective Sense-Making in Corporate Annual Reports: Banks’ Graphical Reporting During the Global Financial Crisis

This study investigates two potentially complementary reporting scenarios in annual reports: reactive impression management and retrospective sense-making. It examines stock market performance graphs in European listed banks’ annual reports before and during the global financial crisis. Our results indicate that banks reacted to the global financial crisis by omitting stock market performance graphs from the annual report and from its most prominent sections. On the other hand, banks reduced favorable distortions and favorable performance comparisons. No significant evidence of retrospective sense-making is found. Overall, the findings are consistent with impression management incorporating human cognitive biases, with companies preferring misrepresentation by omission over misrepresentation by commission. Under high public scrutiny, banks appear to seek to provide a more favorable view by concealing negative information rather than by favorable distortions or comparisons. The study contributes to the development of impression management theories. It uses a psychological interpretation that incorporates human cognitive biases, rather than adopting a purely economically based perspective.