Purpose
This study aims to examine whether the disclosure tone in earnings announcements is related to a firm’s corporate social responsibility (CSR) performance.
Design/methodology/approach
Considering the lower likelihood of earnings management conducted by CSR-conscious firms, and the significant market impact of the tone of disclosure in the earnings announcements, the study investigates whether firms with good CSR performance attempt to influence investors’ judgements through “soft information” and, thus, produce earnings announcements with more positive tone. Specifically, it examines whether CSR performance is positively related to the optimistic disclosure tone in earnings announcements.
Findings
The study finds that more socially responsible firms exhibit a more optimistic tone in earnings announcements. The findings are robust to a variety of sensitivity tests and data from different years. Furthermore, the study finds that the positive association between CSR performance and disclosure tone in the earnings announcement is particularly apparent in the manufacturing industry.
Research limitations/implications
This study contributes to the literature in multiple ways.
Practical implications
These findings should assist regulators in better understanding the verbal components in earnings announcements.
Social implications
It is possible that firms might opportunistically engage in CSR activities to enhance their social image to exaggerate financial performance and influence investors’ 2019 decisions.
Originality/value
These results show that CSR performance is positively associated with the optimistic tone in earnings announcements. The findings are consistent with two alternative interpretations. First, even though CSR-conscious firms are unlikely to engage in earnings management, they may engage a more subtle form of impressions/tone management. Second, firms with better CSR performance may have better financial performance, and thus are more confident and optimistic, resulting in a more positive tone in their earnings announcements. As the study controls for financial performance and find a positive relation between CSR concerns and optimism in earnings announcements, it favors the previous explanation.
Earnings Management Flexibility and Market Reactions to Earnings Announcements
