The signalling theory posits that the most profitable companies provide the market with more and better information in order to be fairly evaluated. Empirical evidence that relates companies’ profitability to their disclosure habits, however, reveals disaccording results. To better circumscribe the signalling mechanism, our paper centres on a focal point of the signals that companies send to the financial market: profitability indicators. We have scrutinized the 2008 Management Commentaries of a sample of Italian and UK companies. After controlling for size, risk, industry, and country, our analysis supports the presence of signalling mechanisms. These results corroborate the literature which considers the market capable of autonomously controlling the production and use of information. The main practical implication of our results relates to the communication policies of the information included in the internal control system and, as a consequence, also to the regulation of narrative information in annual reporting.
Keywords: Signalling Theory, Financial Market, Disclosures Policies, Profitability indicators, Financial Statement, Management Report.