Tone Management

Abstract

We investigate whether and when firms manage the tone of words in earnings press releases, and how investors react to tone management. We estimate abnormal positive tone, ABTONE, as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such as performance, risk, and complexity. We find that ABTONE predicts negative future earnings and cash flows, is positively associated with upward perception management events, such as, just meeting/beating thresholds, future earnings restatements, SEO, and M&A, and is negatively associated with a downward perception management event, stock option grants. ABTONE has a positive stock return effect at the earnings announcement and a delayed negative reaction in the one and two quarters afterward. Balance sheet constrained firms and older firms are more likely to employ tone management over accruals management. Overall, the evidence is consistent with managers using strategic tone management to mislead investors about firm fundamentals.

Optimistic tone and audit fees: Some Australian evidence

“…Qualitative information disclosures provided by management are increasingly regarded as an important supplement to information presented in financial statements (Huang, Teoh, & Zhang, 2014;Kothari, Xu, & Short, 2009). Accordingly, recent accounting and finance research has paid attention to the association of linguistic attributes of corporate reports with corporate behavior and economic outcomes (Biddle, Hilary, & Verdi, 2009;Davis, Piger, & Sedor, 2012;Huang et al, 2014;Larcker & Zakolyukina, 2012;Li, 2008;Rogers, Van Buskirk, & Zechman, 2011). The sentiment (i.e., tone) of messages reflected in annual reports (Henry, 2008;Huang et al, 2014;Yekini, Wisniewski, & Millo, 2016) tends to influence investors' and analysts' views about firms.…”

Contemporaneous verification of language: evidence from management earnings forecasts

“…25 The coefficient on NetPositivity is negative but insignificant. Huang et al (2014) document a price reversal on a proxy for abnormal tone in the context of earnings releases (i.e., a significant negative coefficient). To investigate whether our "unverified" tone would yield similar results as their abnormal tone measure, we repeated our estimation of equation (3ʹʹ) on a smaller sample for which we could obtain data on a majority of control variables they use in their study (i.e., size, book-to-market, earnings volatility, return volatility, return level, and accruals).…”

Readability of compensation discussion and analysis: the impact of the Plain English initiative

“…There is a growing research in accounting and finance using the textual analysis of qualitative information (Tetlock, 2007;Tetlock, Saar-Tsechansky and Macskassy, 2008;Li, 2008;Lehavy, Li and Merkley, 2011;Loughran and McDonald, 2011;Larcker and Zakolyukina, 2012;Huang, Teoh and Zhang, 2014). These papers have studied various qualitative dimensions of the disclosures such as positive vs. negative tone (Tetlock Saar-Tsechansky and Macskassy, 2008;Huang, Teoh and Zhang, 2014), readability (Li, 2008;Lehavy, Li and Merkley, 2011) and self-reference bias (Larcker and Zakolyukina, 2012). Our focus is on the readability of company CD&A in the proxy statement.…”