Children struggle with the interpretation of pronouns in direct speech ("Ann said, 'I get a cookie'"), but not in indirect speech ("Ann said that she gets a cookie") (Köder & Maier, 2016). Yet children's books consistently favor direct over indirect speech (Baker & Freebody, 1989). To reconcile these seemingly contradictory findings, we hypothesize that the poor performance found by Köder and Maier (2016) is due to the information-transmission setting of that experiment, and that a narrative setting facilitates children's processing of direct speech. We tested 42 Dutch children (4;1-7;2) and 20 adults with a modified version of Köder and Maier's referent selection task, where participants interpret speech reports in an interactive story book. Results confirm our hypothesis: children are much better at interpreting pronouns in direct speech in such a narrative setting than they were in an information-transmission setting. This indicates that the pragmatic context of reports affects their processing effort.