Disclosure tone management and labor unions

Arslan‐Ayaydin, Özgür; Thewissen, James; Torsin, Wouter

doi:10.1111/jbfa.12483

Cited by 23 publications

(15 citation statements)

References 88 publications

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“…They argue that a superior management team is likely to create more positive expectations of its firm's operational performance, which should result in a more positive tone in their earnings announcement. Instead, our analyses point toward the strategic use of corporate disclosures by low-ability managers such as in the study of Bochkay et al (2019), Huang et al (2014), Arslan-Ayaydin et al (2016) and Arslan-Ayaydin et al (2020, 2021. This interpretation is consistent with our theory suggesting that career concerns motivate opportunistic behavior among managers of low ability and is also in line with our additional analyses examining the manipulation of other linguistic cues in corporate disclosures.…”

Section: Introductionsupporting

confidence: 89%

“…They conclude that, since earnings press releases are reacted to more heavily by the markets relative to MD&As, managers use more optimistic language in the former. Finally, Arslan-Ayaydin et al (2016) find that managers tend to inflate the tone of earnings press releases, as their compensation becomes more sensitive to the firm's stock price, while Arslan-Ayaydin et al (2020, 2021 show that managers tend to be less optimistic in their corporate disclosures to maintain enough bargaining power in negotiations with labor unions. These studies conclude that, aside from an informative component, there exists a promotional aspect to the linguistic tone (Henry, 2008).…”

Section: Tone Managementmentioning

confidence: 99%

“…We re-encoded the downloaded HTML-files, containing the earnings press releases, into a readable format. While parsing the text, we adhere to the following steps applied by previous studies (see, among others, Davis and Tama-Sweet, 2012;Arslan-Ayaydin et al, 2016, 2021;…”

Section: Data Collectionmentioning

confidence: 99%

“…We follow prior studies and define the tone of earnings press releases as the relative spread between the number of positive and negative words (see, e.g. Arslan-Ayaydin et al, 2016;Boudt et al, 2018;Arslan-Ayaydin et al, 2020, 2021:…”

Section: Tone Of Earnings Press Releasesmentioning

confidence: 99%

“…Indeed, prior research finds that the tone of these press corporate earnings announcements-proxied as the spread in the percentage of positive Tone management and managerial ability and negative wordsis an indicative signal of managers' future earnings expectations, which also explains why investors tend to react positively to the tone in a short window around the announcement date (see, e.g. Boudt et al, 2018;Henry, 2008;Arslan-Ayaydin et al, 2016, 2021. However, recent evidence finds that the tone of earnings press releases is not only affected by financial performance, but also by the presence of manager-specific incentives, such as the CEO's compensation structure (Arslan-Ayaydin et al, 2016), the issue of equity and stock option grants (Huang et al, 2014) and merger and acquisition decisions (Huang et al, 2014).…”

Section: Introductionmentioning

confidence: 99%

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Does managerial ability affect disclosure? Evidence from earnings press releases

Yan

Arslan‐Ayaydin

Thewissen

et al. 2021

ARA

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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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