The tone of a firm's financial disclosure is increasingly used as a variable in panel data regressions to predict future performance and explain investors' reaction at earnings announcement. We investigate when tone is informative, and argue that the informativeness of tone increases with the information asymmetry between firms and investors. Using a sample of over 50,000 earnings press releases of about 1800 U.S. public firms between 2004 and 2015, we find that firm growth, size, age, complexity and forecast inaccuracy are key drivers of tone informativeness. The effect is economically significant, since, compared to the reference case of a transparent firm, we find that the slope coefficient of tone doubles or even quadruples in panel data regressions when the firm operates in an environment with high information asymmetry.

PurposePrior research shows that managers with lower ability release less accurate management earnings forecasts and have more earnings restatements, lower earnings persistence and lower quality accruals estimations. Yet, whether the impact of managerial ability (MA) on financial reporting can be extended to the narrative section of firms' financial disclosures needs to be theoretically and empirically examined. The authors theorize in this paper that managers with low ability opportunistically inflate the tone to increase outsiders' perceptions of their ability. The authors also examine the relation between MA and the informativeness of tone to predict future firm performance and explain investors' reaction at earnings announcement.Design/methodology/approachThe authors collect 24,000 earnings press releases of 1,149 distinct firms between 2004 and 2013. Content analysis is used to proxy the tone of the disclosures. The authors use the score developed by Demerjian et al. (2012) to measure MA. The authors then employ panel data regressions to examine the impact of MA on disclosure tone.FindingsThe authors find that low-ability managers inflate the disclosure tone to positively influence labor market's perceptions about their ability. This effect is magnified for younger and shorter-tenured managers, for firms with more intense monitoring and during bear markets. The authors also find that the tone of earnings press releases of low-ability managers results in a lower stock price reaction. Supplementary analyses show that the results do not only hold for the tone, but also can be extended to other linguistic features such as the numerical intensity and the readability of earnings press releases. The results are robust to alternative library specifications and other corporate disclosures such as CEO letters to shareholders or 10-K filings.Research limitations/implicationsThe paper shows that managers worry about how firm performance influences the labor market assessment of their ability. In particular, the authors find that managers of low ability are willing to opportunistically manipulate the content of corporate disclosures to improve this perception and build their reputation.Originality/valueThe authors contribute by providing theoretical and empirical evidence on how managers attempt to steer assessments of their ability by manipulating corporate disclosures. Consistent with prior business research suggesting that one's ability is a key feature that affects managers' propensity to engage in ethical practices, such as tax avoidance or manipulation of financial information, this study shows that less able managers tend to inflate the tone of the earnings announcements and that this ability-driven bias is likely to be magnified by career concerns.

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By analyzing the influence of labor unions on the narrative content of corporate disclosures, we provide empirical evidence that managers deflate the tone of earnings press releases in order to convey to unions a less optimistic image of firm financial performance. We find that the tone of the qualitative information in earnings press releases is significantly less optimistic as the degree of unionization increases, and particularly when financial performance is strong. The results of quasi‐natural experiments suggest that labor unions causally affect the use of tone deflation, and the deflation is stronger during labor negotiations. Our findings also indicate that labor unions lead to a significant weakening of the signaling value of the tone of earnings press releases in predicting future performance.

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