Theoretical Perspectives on Corporate Narrative Disclosures: New Insights from Psychology, Sociology, and Critical Perspectives

Theories from traditional finance (e.g. agency theory) are not suitable for impression management research as they are based on fundamental assumptions of manager and investor rationality. For the assumption that impression management results in capital misallocations to hold true requires alternative theoretical perspectives. This paper develops theoretical perspectives on corporate narrative disclosures beyond prior research using insights from behavioural finance/economics, psychology and sociology and the critical perspectives literature. Two analytical frameworks are presented: (i) The framework for corporate narrative reporting by managers adopts four theoretical perspectives based on economics, psychology, sociology and critical theories. Three competing explanations of corporate narrative disclosures by managers are identified: incremental information, impression management (the primary focus of the paper) and hubris. (ii) The framework for investors’ susceptibility to corporate narratives adopts three theoretical perspectives based on economics, behavioural finance/economics, and sociology. These analytical frameworks are illustrated by application to prior narrative disclosure research from a preparer and user perspective. The range of assumptions underlying prior research is made explicit. The inconsistencies in some of these assumptions are identified. Gaps in the prior literature are revealed and opportunities for future research are identified.