The Contribution of Banks' Annual Report Writing Quality to Investor Decision-Making

Article excerpt

ABSTRACT

This project investigated reader responses to excerpts from banks' annual reports. In particular, readers were asked to evaluate the writing quality of the excerpts. Based solely on their evaluations of the annual reports, readers were asked how likely they were to invest in the bank. Our study yielded interesting results regarding the readers' investment decision-making processes. Over 50 percent of respondents said that they "always" or "often" read a company's annual report when considering investing in it. Furthermore, 43.2 percent said that their investment decisions are greatly affected by the understandability of a company's annual reports. Clearly, investors, employees, and other stakeholders rely on annual reports when making important strategic and financial decisions. While a bank's annual report is widely recognized as a communication tool, it has become more important than ever that its writers have the rhetorical skills to compose a document that is clear and understandable. Trust and confidence are complex attitudes that are not easily affected. But annual reports that are clear and informative rather than obfuscative or blatant marketing efforts will make an important contribution to a bank's credibility.

EVOLUTION OF THE ANNUAL REPORT

The annual report ostensibly serves a simple purpose in American business--to evaluate the financial performance of the corporation during the previous year. This stylized business report originated with the Securities Acts of 1933 and 1934, known as the "truth in securities" laws. These acts established the Securities and Exchange Commission (SEC) and required companies with more than $10 million in publicly traded assets to issue independently audited annual reports providing investors with information, including:

A statement of earnings

A balance sheet

A statement of cash flow

A statement of stockholders' equity

Relevant quantitative and qualitative information needed to understand the data (Plung & Montgomery 2004).

After thirty years, a new idea emerged. In addition to answering the financial obligations, annual reports could also serve as the corporation's principal public relations document. As a public relations tool, annual reports became advertisements for the company. Management used them as a platform for promoting their philosophies, strategies, and corporate successes. Annual reports took on a magazine look. They included glossy paper, color photographs, fancy graphics, and layouts.

By 1986, the SEC was receiving criticisms that annual reports sacrificed information for design. Investors wanted shorter reports that gave clearer perspectives on a company's earning potential. After three years of study, the SEC agreed to a radical change in reporting style--companies could put detailed financial information into a separate document (the 10-K or Proxy Statement) and create a Summary Annual Report (SAR). This SAR was more compact, concise, and readable. It moved footnote material into the narrative, used more graphs, and wrote financial information in laymen's terms (Kulkosky 1987). The SAR effectively recast the report into the province of the communicator, who would now be assisted by, rather than dictated to by, the analysts and design houses.

The first company to produce an SAR was McKesson Corporation in 1987. The company claimed they saved $60,000 in production costs, or 20 percent of their annual total expense for financial reports. The corporate Vice President also praised the SAR for "greatly improving the readability of the report and its use as a communication device" (Simone 1988).

After the scandals of 2001 involving Enron, Arthur Andersen, WorldCom, Xerox, and other companies, public confidence in the securities and accounting industries plummeted. Public scrutiny of corporate financial disclosures increased. As a result, last year, President George W. …