Does managerial ability affect disclosure? Evidence from earnings press releases

Abstract

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.

Does Managerial Ability Affect Segment Disclosure? Evidence From Indonesia

“…The findings in this study strengthen previous literature, stating that high-ability managers produce high earnings quality, less financial reporting fraud, and extensive disclosure (Baik et al, 2018(Baik et al, , 2020bDemerjian et al, 2013;García-Meca & García-Sánchez, 2018;Huang & Sun, 2017;Wang et al, 2017). The result of this study is also consistent with previous studies, which found that managerial ability could improve firms' reporting and disclosure (Baik et al, 2018), such as climate change disclosure (Daradkeh et al, 2022), corporate social responsibility (García-Sánchez et al, 2020), timeliness of financial disclosure (Abernathy et al, 2018), and disclosure quality (Yan et al, 2021).…”

“…High-ability managers also tend to produce more timely financial disclosures (Abernathy et al, 2018). Meanwhile, low-ability managers tend to inflate the disclosure (tone, numerical intensity, and readability) to positively influence the labor market's perceptions about their ability, which will cause a lower stock price reaction (Yan et al, 2021). Lowability managers are also willing to opportunistically manipulate the content of corporate disclosure to improve market perception and their reputation.…”

“…Previous studies have found that higher-ability managers produced more informative earnings, less financial reporting fraud, higher quality of information environment, and higher firm performance (Baik et al, 2018(Baik et al, , 2020aGarcía-Meca & García-Sánchez, 2018;Herianti et al, 2021;Huang & Sun, 2017;Park et al, 2016;Wang et al, 2017;Yung & Chen, 2018). Furthermore, managers with high ability also tend to produce a higher quality information environment, including disclosure (Abernathy et al, 2018;Daradkeh et al, 2022;García-Sánchez et al, 2020;Hasan, 2020;Yan et al, 2021). Since segment information is essential, high-ability managers may comprehensively disclose their operating segment information to signal their firm's performance to stakeholders.…”

Ex-auditor executives and investment efficiency: evidence from Indonesia

“…This is shown through the results of previous studies, which found that CEOs with high managerial abilities could overcome two causes of inefficient investments, such as underinvestment and overinvestment (Gan, 2019). Furthermore the ability of the CEO matters because it could be associated with opportunistic behavior, because lower ability CEOs tend to release less accurate management earnings forecasts (Yan et al. , 2021).…”

Managerial Ability and Investors Protect: Test of Stimulating Decision-Making Functions by Devil's Advocate Theory

“…From a research perspective, it should be noted that most of the research conducted in the field of managerial ability, such as the research of Yan et al (2021); Bradley and Sun (2021); Chen and Chen (2020); Rashidi (2020) and Jabbarzadeh Kangarluie and Radi (2019), it has sought to quantitatively examine the relationship between this variable and other variables in the financial field, and less research has sought to link the relationship between quantitative and qualitative characteristics to the effect of managerial ability on protecting shareholders' interests to develop theories related to behavioral sciences in accounting from a practical point of view, it should be noted that in Iran, over time, along with improving the level of operational transparency, many efforts have been made to improve the performance of the company and managers against stakeholders, including the Corporate Governance Law of 2007; Publication of internal control report in 2012; Establishment of an audit committee in 2011 and, most importantly, the ranking of companies in terms of the quality of disclosure in 2014.…”