Does Accounting Conservatism Discipline Qualitative Disclosure? Evidence From Tone Management in the MD&A*

Abstract

We investigate whether accounting conservatism, which has been found to be effective in constraining management opportunism in other settings, constrains upward tone management (UTM) in the Management's Discussion and Analysis (MD&A) portion of the 10-K filing. We hypothesize that conservatism makes it harder for managers to opportunistically downplay bad news and magnify good news when discussing current performance. Consistent with this hypothesis, we find that UTM is negatively associated with several accounting conservatism proxies. Additionally, we hypothesize and find that this association is stronger for firms where managers have higher incentives to manipulate tone. In supplemental analyses, we find evidence to suggest that our results are not due to an endogenous relationship between conservatism and UTM. We also find that conservatism neither encourages downward tone management (DTM) nor constrains managers from conveying real information about future good news. Together, our results suggest that accounting conservatism improves disclosure narratives.

Pessimistic Tone in Earnings Announcement and CSR Disclosure: Exploring the Interacting Role of CEO Busyness

“…Additionally, the pessimistic tone is a variable of interest. This variable is measured using a pessimistic tone score obtained from the total pessimistic words according to the list of pessimistic words in Diction 7.0 [55] divided by the total words in the comprehensive income statement in management analysis and discussion [16,56]. Diction 7.0 is a scientific method for determining the tone of a verbal message using a powerful Windows-or Macbased program that searches a passage for five general lexical features as well as thirty-five sub-features (see Table 1).…”

“…The more transparent and symmetry information means the higher expectation from an external party. Managers use a pessimistic tone in order to signal an external party about the possibility of underperforming due to economic and non-economic factors reported [16]. As a consequence, CSR disclosure is an effective tool to strengthen corporate image [18], manage reputation risk [19], and reduce potential legitimacy gaps [17].…”

“…The existence of a financial service authority regulation [5] that obligates public firms to report MD&A increases the level of transparency and reduces asymmetry information, as the report is a tool of communication for other parties. The reason a manager uses pessimistic tones while describing earning announcements is because they anticipate the risk of financial performance declining when economic and non-economic factors change, as compared to predictions in previous MD&A reports [16]. The pessimistic tones indicate a better level of transparency, especially in developing nations such as Indonesia.…”

“…The pessimistic tones indicate a better level of transparency, especially in developing nations such as Indonesia. On the other hand, the use of a pessimistic tone in earnings announcements can signal a decline in performance, which can reduce the image and legitimacy of the firm [16]. To cover this, firms make voluntary disclosures (for example, CSR disclosure), both for financial and non-financial aspects, to give the impression of transparency [17].…”

“…Different from previous research [16,20], the focus of this study is to look at the relationship between the pessimistic tone in earnings announcements in an MD&A report and the disclosure of corporate social responsibility (CSR). In addition, this study considers CEO busyness in the relationship between pessimistic tones and CSR disclosure.…”