Identifying the Characteristics and Dimensions of Emotional Tone in Companies’ Annual Reports and Examining Its Relationship with Financial Distress
Keywords:
Financial Distress, Emotional Tone, Annual Reports, Thematic AnalysisAbstract
This study aims to identify the dimensions of emotional tone in annual reports and examine their relationship with the probability of corporate financial distress to provide qualitative indicators complementing traditional predictive models. A qualitative approach using thematic analysis was employed. Data were collected through semi-structured interviews with 15 financial managers and expert analysts selected purposefully based on at least five years of experience analyzing financial reports. The analysis process included open, axial, and selective coding. Credibility and reliability were ensured through Guba and Lincoln’s criteria, and inter-coder agreement was measured using Krippendorff’s alpha and Cohen’s kappa. The results revealed that negative emotional tone—including financial concerns, profitability decline, liquidity issues, and economic crises—acts as an early warning indicator of financial distress. In contrast, positive tone, reflected in sustainable growth, improved cash flow, and reduced debt, indicates financial stability and lower distress risk. Ambiguity regarding economic outlook and long-term strategies, as well as references to managerial weaknesses, were also associated with increased distress risk. Moreover, external factors such as economic volatility, sanctions, and legal issues significantly influenced the tone of reports and distress prediction. Analyzing the emotional tone of annual reports can serve as a complementary tool to quantitative models for predicting financial distress, enabling analysts, managers, and investors to identify early warning signals of financial crises. It is recommended that companies and regulators integrate thematic analysis and natural language processing into financial health assessment frameworks.
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Copyright (c) 2025 Majid Jahan Tigh (Author); Akram Taftian (Corresponding author); Mahmoud Moeinaddin (Author)
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