Abnormal disclosure tone, earnings management and earnings quality

PurposeThe authors investigate whether abnormal tone in corporate narrative disclosures is associated with earnings management and earnings quality, in an emerging market context. Based on agency theory and opportunistic/impression management perspective, this study examines whether executives manage disclosure tone to support their opportunistic behavior, when using earnings management.Design/methodology/approachThis study uses a sample of earnings press releases of publicly traded firms in the MENA region during 2014–2019. It employs textual analysis to measure disclosure tone. The authors estimate abnormal disclosure tone after controlling for firm characteristics. Discretionary accruals proxy for earnings management and are estimated using Modified Jones model. Earnings quality is measured using accounting-based and market-based proxies: earnings smoothness, persistence, predictability and value relevance/informativeness.FindingsResults show a positive association between abnormal disclosure tone and earnings management. Additionally, results show that earnings persistence is higher for firms with lower levels of abnormal disclosure tone. Results are sustained for earnings smoothness, but not for predictability and value relevance/informativeness.Research limitations/implicationsResults provide initial evidence of management's use of tone management jointly with earnings management. This adds to prior studies adopting the opportunistic perspective of disclosure tone, through showing that discretionary tone in narrative disclosures can be strategically used by management to influence investors' perceptions.Practical implicationsThe results provide valuable insight to board of directors, auditors and market participants on the possible biases emerging from tone of narrative disclosures in corporate reports. For regulators and standard-setters, results shed light on the need for regulations and rules beyond financial statements, to guide disclosure of narrative information in different corporate reports.Originality/valueThis study contributes to the rare evidence that investigates textual disclosure characteristics to uncover management's opportunistic practices and assess earnings quality. Where majority of studies concentrate on developed markets, this study provides novel evidence of emerging markets by examining the association between abnormal disclosure tone and earnings management/earnings quality. Also, it validates the tone management model proposed by Huang et al. (2014) for capturing tone manipulation.

Audit Committees and COVID-19-Related Disclosure Tone: Evidence from Oman

In this study, we content analyzed chairman’s statements to measure the tone of COVID-19-related disclosure in Omani listed firms for the year ending 2020. We also examined whether audit committee (AC) characteristics influence disclosure tone. After controlling for corporate board and firm characteristics, our regression analysis showed that two AC characteristics (gender diversity and overlapped directors) positively affect good news information and negatively affect bad news information. It also showed that AC size positively affects bad news information. No evidence was found that the AC independence, meeting frequency, multi-directorships, and financial expertise have an impact on the tone of COVID-19-related disclosures. Our paper contributes to the growing literature by being the first study to examine whether AC characteristics influenced disclosure tone during the COVID-19 pandemic. Our results indicate that investors and regulatory bodies should take AC characteristics into account in determining the tone of COVID-19-related disclosures.

Positive Tone in Management Reports and Volatility of Stock Returns

This article aims to analyse the effects of positive tone in management reports on stock return volatility. It is expected that this article contributes to the literature about disclosure by proposing an objective textual content analysis of management reports, focussing on optimistic words or expressions employed by firms and their effect on stock return volatility. The sample consisted of management reports and financial data from 576 different Brazilian firms’ stocks. Regarding volatility, our measure is based on daily stock returns from 1 April 2011 to 23 October 2020. The data related to positive tone and control variables were based on the fiscal years 2010–2019. Therefore, the database contains 3,945 stock-year observations. The study hypothesis was tested through a regression model with panel data. The main results suggest that companies with higher positive disclosure tone scores do not necessarily present lower stock return volatility in the subsequent period. The objective content of financial reports (for example, in relation to profitability) seems to be related to stock volatility; however, the tone of subjective expressions does not represent the main determinant of stock volatility.

How Destination Social Responsibility Shapes Resident Emotional Solidarity and Quality of Life: Moderating Roles of Disclosure Tone and Visual Messaging

This study investigates how destination social responsibility (DSR) improves resident quality of life (QOL) through the lenses of signaling theory and emotional solidarity theory. The study demonstrates the mediating role of resident emotional solidarity toward the destination and the moderating roles of disclosure tone and visual messages. Three experiments indicate that continuous (vs. one-time) DSR positively affects resident emotional solidarity and QOL, whereas emotional solidarity has a mediating role. Emotional solidarity elicited by continuous (vs. one-time) DSR is significantly higher when the disclosure tone of DSR is vivid (vs. pallid). However, when DSR is disclosed using visual messages, emotional solidarity effects of DSR types are not different in vivid tone but have significant differences in pallid tone. This study expands the application of signaling theory and emotional solidarity theory to resident QOL studies and provides suggestions on improving residents’ QOL through DSR.

Executives vs. governance: Who has the predictive power? Evidence from narrative tone

This study aims to investigate not only Narrative Disclosure Tone predictive power, but also who has this power within companies to predict future performance in the UK context (executive vs. governance). We conduct a computerized textual analysis to measure the tone of UK annual reports narratives. Our results contribute to accounting and financial reporting literature by showing that corporate narrative tone can predict future performance. However, answering our main question about who has this predictive power, we found executives’ reporting tone has the power to predict a company’s future performance but not governance tone. Considering the moderation effect of the 2014 financial reporting guidance, we found this guidance increases corporate narrative tone power in general and executive tone in particular in predicting future performance. Moreover, the current study contributes to financial reporting literature by providing a UK evidence, which operates under the principles-based approach with more flexibility in financial reporting than the US context that follows the rules-based approach. Finally, this study has practical implications for regulators and external users of financial reporting.

Audit committee disclosure tone and earnings management

PurposeThis paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management.Design/methodology/approachThe authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms.FindingsThe analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone.Research limitations/implicationsOverall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality.Practical implicationsOverall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality.Originality/valueThough the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.