Validity of Annual Report Assertions about Quality: An Empirical Study

Over the last few decades, annual reports have been content analyzed to measure various organizational phenomena. These studies assume, either implicitly or explicitly, that Annual Report Text (ART) assertions are accurate representations of the firm and its managers. This assumption diverges from a common suspicion that corporate managers use their ART as a public relations tool. To date, only 3 ART validity studies have been occasional and the results are mixed and dated. In this study, the ARTs of 100 randomly selected Fortune 500 and Service 500 firms are content analyzed to test the relationship between ART assertions about quality and 3 external measures of quality. The results strongly indicate that ART assertions about quality are valid. The implications are: 1. that ARTs may be indicators of what management deems important and focuses their attention on, 2. that it lends some support to previous studies relying on ART data, and 3. that it could spark interest in furthering systematic empirical testing of ART validity. Moreover, practitioners could use ARTs to assess a firm's commitment to quality, prior to buying their products, providing them with financial capital, entering into a just-in-time relationship, and so on.