The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk

Fu, Xi; Wu, Xiaoxi; Zhang, Zhifang

doi:10.1007/s10551-019-04326-1

Cited by 39 publications

(18 citation statements)

References 89 publications

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“…However, our findings show that negativity in narrative disclosures also matters within the UK context, as it can be used as an indicator for a firm's future performance. These results corroborate Fu et al (2019) and Iatridis (2016), who document a significant link between negativity in annual reports and future stock price crash and earnings manipulation, respectively, in the US context. Our study builds on and extends this line of inquiry by providing new empirical evidence suggesting that negativity does matter even in a flexible principle-based context such as the UK, where managers have more opportunities to bias the narrative tone upwards.…”

Section: Multivariate Results and Discussion 421supporting

confidence: 88%

“…Similarly, Fu et al (2019) report that a negative tone can predict future stock price crashes. In addition, Loughran and McDonald (2011) raise another critical point, suggesting that negativity is less noisy in measuring narrative tone than positivity.…”

Section: Literature Review and Hypotheses Development 21 General Back...mentioning

confidence: 99%

“…Second, since our main focus is on negative tone in annual report narratives, the LM wordlist is the most comprehensive NDT tone wordlists containing over 3,400 negative words. Subsequently, we measure negative tone as the number of negative words divided by the total number of words to control for the length of the annual reports (Loughran and McDonald, 2011; Huang et al , 2014; Fu et al , 2019; Davis et al , 2015). We further split narrative reporting tone into executives and governance components to examine which type of narrative reporting tone predicts a firm’s future performance.…”

Section: Research Design and Datamentioning

confidence: 99%

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Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

Bassyouny,

Machokoto

2023

IJAIM

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Purpose This paper aims to investigate the association between negative tone in annual report narratives and future performance in the UK context. Under the principle-based approach in the UK, managers tend to bias the tone of narrative reports upward, as the reporting regime is more flexible than the rule-based approach in the USA. Consequently, any negative disclosure not mandated by regulators conveys credible information about a firm’s prospects. Design/methodology/approach This paper uses a sample of UK FTSE all-share non-financial companies from 2010 to 2019. The authors use the textual-analysis approach based on Loughran and McDonald (2011)’s wordlist (LM) to measure the negative tone in UK annual reports. Findings The results show a significant negative association between negative tone and future performance. Moreover, our further analyses suggest that only the negativity in the executive section of the annual disclosures correlates significantly with future performance. In summary, this study suggests that negativity does matter under the principle-based approach and can be used as an indicator of future performance. Originality/value In contrast to the literature arguing that only positivity has the power to affect a firm’s outcomes under the principle-based approach, the authors provide new empirical evidence suggesting that negativity also matters within the UK context and can be used as an indicator for future performance. Also, to the best of the authors’ knowledge, this is the first study to identify which section of the annual report is more informative about a firm’s future performance.

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Section: Multivariate Results and Discussion 421supporting

confidence: 88%

Section: Literature Review and Hypotheses Development 21 General Back...mentioning

confidence: 99%

Section: Research Design and Datamentioning

confidence: 99%

See 1 more Smart Citation

Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

Bassyouny,

Machokoto

2023

IJAIM

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“…, 2016). A particular interest has been to what extent managers' rhetoric and tone can lower the risk of a loss in share price, be that by conveying optimism (Xi et al. , 2021) or by including cues of morality (Jancenelle, 2021).…”

Section: Introductionmentioning

confidence: 99%

Analysts' identity negotiations and politeness behaviour in earnings calls of US firms with extreme earnings changes

Koller

2023

CCIJ

Self Cite

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PurposeFinancial analysts' roles and incentives mean that they have conflicting identities to maintain towards investors and firm managers. The authors study how analysts adopt various politeness strategies in their questioning to establish socially desirable identities in the Q&A of publicly accessible earnings calls.Design/methodology/approachThe study is based on a sample of US firms with extreme earnings changes. 46 transcripts of end-of-year earnings calls were investigated with the help of linguistic discourse analysis, drawing on frameworks of face and linguistic politeness. For each transcript, the authors identified the structure of the face-threatening acts (FTAs) that arise when analysts ask probing questions and ascertained what specific politeness strategies, if any, are used by analysts to mitigate those FTAs. The authors examine how analysts perform identities through politeness in language and compare analysts' politeness behaviour and identity construction in the increasing earnings sub-sample with the decreasing earnings sub-sample.FindingsAnalysts negotiate different identities according to specific social contexts, promoting their identity as (1) competent professionals when firms report problematic performance by asking questions in a confrontational manner with few politeness strategies and (2) dependents of the firm by asking questions in a more polite manner when firms experience satisfactory performance. Analysts aim to present a socially desirable face in Q&A to influence managers' and investors' perceptions.Practical implicationsThe study raises awareness about linguistic politeness as a communication strategy in the Q&A in earnings calls. It thereby enables managers and analysts to use linguistic politeness consciously and strategically and to recognise such use by others.Originality/valueThis study complements existing literature on earnings conference calls as part of external corporate communications by focusing on analysts' use of language when interacting with manages. To the best of our knowledge, this paper is the first to show that politeness underpins analysts' language use as a device for identity negotiations. This is important to understand because analysts' identities vis-a-vis managers and investors is closely related to the stability of the financial system.

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“…Prior studies view the accumulation of bad news (‘bad news hoarding’) as the key factor in the formation of a stock price crashes (Chang et al, 2017; Hutton et al, 2009; Jin & Myers, 2006; Kim & Zhang, 2016). That is, bad news accumulated over an extended period will eventually reach a critical point at which it will then be released all at once, leading to a substantial revision of investors' expectations about the future performance of the firm and to a stock price crash (Chen et al, 2019; Fu et al, 2021; Hutton et al, 2009; Jin & Myers, 2006; Kim et al, 2011).…”

Section: Introductionmentioning

confidence: 99%

Litigating crashes? Insights from security class actions

Zhang

Jin

2022

Accounting & Finance

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Investors tend to litigate large stock price declines, i.e., file ‘stock‐drop lawsuits’. However, it is less clear whether the ex‐ante threat of security class actions can deter stock price crashes in the first place. To answer this question, we exploit the 1999 ruling of the Ninth Circuit Court of Appeals that discourages security class actions as a quasi‐exogenous shock, and find that reducing the threat of security class actions leads to a significant increase in stock price crash risk measured by negative skewness of stock returns. We reveal that the main effect is partially driven by a reduction in the timeliness of bad news disclosure and worsened earnings quality, which is consistent with the view that bad news hoarding serves as the key factor in the formation of a stock price crash. Our overall findings highlight the importance of security class actions in deterring the occurrence of firm‐level negative tail events on the financial market.

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The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk

Cited by 39 publications

References 89 publications

Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

Does negativity matter under the principle-based approach? Evidence from narrative reporting in the UK

Analysts' identity negotiations and politeness behaviour in earnings calls of US firms with extreme earnings changes

Litigating crashes? Insights from security class actions

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