[en] Using a sample of about 24,000 earnings press releases by S&P1500 firms between 2004 and 2013, we find that low-ability managers inflate the disclosure tone to positively influence labor market's perceptions about their ability. This effect is magnified for younger and shorter-tenured managers, for firms with more intense monitoring and during bear markets. We also show that the tone of earnings press releases of low-ability managers is less informative to predict future firm performance and results in a lower stock price reaction. Overall, our findings confirm that managerial ability affects the credibility of qualitative information.
Disciplines :
Finance
Author, co-author :
Yan, Beibei; Shanghai University > SHU-UTS SILC Business School
Arslan-Ayaydin, Ozgur; University of Illinois at Chicago > Department of Finance
Thewissen, James; Université Catholique de Louvain - UCL > Department of Finance
Torsin, Wouter ; Université de Liège - ULiège > HEC Liège : UER > Financial Reporting and Audit
Language :
English
Title :
Does managerial ability affect disclosure? Evidence from earnings press releases
Abrahamson, E. and Amir, E. (1996), “The information content of the president's letter to shareholders”, Journal of Business Finance and Accounting, Vol. 23, pp. 1157-1182.
Akerlof, G.A. (1970), “The market for ‘lemons’: quality uncertainty and the market mechanism”, The Quarterly Journal of Economics, Vol. 84 No. 3, pp. 488-500.
Amir, E. and Lev, B. (1996), “Value-relevance of nonfinancial information: the wireless communications industry”, Journal of Accounting and Economics, Vol. 22 Nos 1-3, pp. 3-30.
Arslan-Ayaydin, Ö., Boudt, K. and Thewissen, J. (2016), “Managers set the tone: equity incentives and the tone of earnings press releases”, Journal of Banking and Finance, Vol. 72, pp. 132-147.
Arslan-Ayaydin, Ö., Bishara, N., Thewissen, J. and Torsin, W. (2020), “Managerial career concerns and the content of corporate disclosures: an analysis of the tone of earnings press releases”, International Review of Financial Analysis, Vol. 72.
Arslan-Ayaydin, Ö., Thewissen, J. and Torsin, W. (2021), “Disclosure tone management and labor unions”, Journal of Business Finance and Accounting, Vol. 48 Nos 1-2, pp. 102-147.
Baik, B., Farber, D.B. and Lee, S. (2011), “CEO ability and management earnings forecasts”, Contemporary Accounting Research, Vol. 28, pp. 1645-1668.
Baik, B., Brockman, P.A., Farber, D.B. and Lee, S. (2018), “Managerial ability and the quality of firms' information environment”, Journal of Accounting, Auditing and Finance, Vol. 33, pp. 506-527.
Bebchuk, L.A. and Stole, L.A. (1993), “Do short-term objectives lead to under- or overinvestment in long-term projects?”, The Journal of Finance, Vol. 48, pp. 719-729.
Billger, S. and Hallock, F. (2005), “Mass layoffs and CEO turnover”, Industrial Relations A Journal of Economy and Society, Vol. 44, pp. 463-489.
Bochkay, K., Chychyla, R. and Nanda, D. (2019), “Dynamics of CEO disclosure style”, The Accounting Review, Vol. 94 No. 4, pp. 103-140.
Botosan, C. (1997), “Disclosure level and the cost of equity capital”, The Accounting Review, Vol. 72, pp. 323-349.
Boudt, K. and Thewissen, J. (2019), “Jockeying for position in CEO letters: impression management and sentiment analytics”, Financial Management, Vol. 48 No. 1, pp. 77-115.
Boudt, K., de Goeij, P., Thewissen, J. and Van Campenhout, G. (2015), “Analysts' forecast error: a robust prediction model and its short-term trading profitability”, Accounting and Finance, Vol. 55 No. 3, pp. 683-715.
Boudt, K., Thewissen, J. and Torsin, W. (2018), “When does the tone of earnings press releases matter?”, International Review of Financial Analysis, Vol. 57, pp. 231-245.
Brockman, P., Lee, H. and Salas, J.M. (2016), “Determinants of CEO compensation: generalist-specialist versus insider-outsider attributes”, Journal of Corporate Finance, Vol. 39, pp. 53-77.
Brockman, P., Li, X. and Price, S.M. (2017), “Conference call tone and stock returns: evidence from the stock exchange of Hong Kong”, Asia-Pacific Journal of Financial Studies, Vol. 46, pp. 667-685.
Chatjuthamard, P., Jiraporn, P., Tong, S. and Singh, M. (2015), “Managerial talent and corporate social responsibility (CSR): how do talented managers view corporate social responsibility?”, International Review of Finance, Vol. 16 No. 2, pp. 265-276.
Chemmanur, T. and Paeglis, I. (2005), “Management quality, certification, and initial public offerings”, Journal of Financial Economics, Vol. 76, pp. 331-368.
Chemmanur, T., Paeglis, I. and Simonyan, K. (2009), “Management quality, financial and investment policies, and asymmetric information”, Journal of Financial and Quantitative Analysis, Vol. 44, pp. 1045-1079.
Chevalier, J. and Ellison, G. (1997), “Risk taking by mutual funds as a response to incentives”, Journal of Political Economy, Vol. 105, pp. 1167-1200.
Cho, H., Choi, S. and Kim, M. (2018), “Cash holdings adjustment speed and managerial ability”, Asia-Pacific Journal of Financial Studies, Vol. 47, pp. 695-719.
Clogg, C.C., Petkova, E. and Haritou, A. (1995), “Statistical methods for comparing regression coefficients between models”, American Journal of Sociology, Vol. 100 No. 5, pp. 1261-1293.
Core, J. and Wayne, G. (2002), “Estimating the value of employee stock option portfolios and their sensitivities to price and volatility”, Journal of Accounting Research, Vol. 40, pp. 613-630.
Custódio, C., Ferreira, M.A. and Matos, P. (2013), “Generalists versus specialists: lifetime work experience and chief executive officer pay”, Journal of Financial Economics, Vol. 108, pp. 471-492.
Das, S., Levine, C. and Sivaramakrishnan, S. (1998), “Earnings predictability and bias in analysts' earnings forecasts”, The Accounting Review, Vol. 73, pp. 277-294.
Davidson, W., Xie, B., Xu, W. and Ning, Y. (2007), “The influences of executive age, career horizon and incentives on pre-turnover earnings management”, Management Science, Vol. 11, pp. 45-60.
Davis, A. and Tama-Sweet, I. (2012), “Managers' use of language across alternative disclosure outlets: earnings press releases versus MD&A”, Contemporary Accounting Research, Vol. 29, pp. 804-837.
Davis, A., Piger, J. and Sedor, L. (2012), “Beyond the numbers: measuring the information content of earnings press release language”, Contemporary Accounting Research, Vol. 29, pp. 845-868.
Davis, A., Ge, W., Matsumoto, D. and Zhang, J. (2014), “The effect of manager-specific optimism on the tone of earnings conference calls”, Review of Accounting Studies, Vol. 20, pp. 639-673.
De Franco, G., Hope, O.-K. and Lu, H. (2017), “Managerial ability and bank-loan pricing”, Journal of Business Finance and Accounting, Vol. 44, pp. 1315-1337.
DeFond, M.L. and Jiambalvo, J. (1994), “Debt covenant violation and manipulation of accruals”, Journal of Accounting and Economics, Vol. 17 Nos 1-2, pp. 145-176.
Dejong, D. and Ling, Z. (2012), “Managers: their effects on accruals and firm policies”, Journal of Business Finance and Accounting, Vol. 40, pp. 82-114.
Demerjian, P., Lev, B. and McVay, S. (2012), “Quantifying managerial ability: a new measure and validity tests”, Management Science, Vol. 58, pp. 1229-1248.
Demerjian, P., Lev, B., Lewis, M. and McVay, S. (2013), “Managerial ability and earnings quality”, The Accounting Review, Vol. 88, pp. 463-498.
Denis, D.J. and Denis, D.K. (1995), “Performance changes following top management dismissals”, The Journal of Finance, Vol. 50, pp. 1029-1057.
Denis, D.J.D.K. and Sarin, A. (1997), “Agency problems, equity ownership, and corporate diversification”, The Journal of Finance, Vol. 52, pp. 135-160.
Diamond, D. and Verrecchia, R. (1991), “Disclosure, liquidity, and the cost of capital”, The Journal of Finance, Vol. 46, pp. 1325-1359.
Dikolli, S., Mayew, W. and Nanda, D. (2014), “CEO tenure and the performance-turnover relation”, Review of Accounting Studies, Vol. 19, pp. 281-327.
Dutordoir, M., Strong, N.C. and Sun, P. (2018), “Corporate social responsibility and seasoned equity offerings”, Journal of Corporate Finance, Vol. 50, pp. 158-179.
Fama, E. and French, K. (2006), “Profitability, investment and average returns”, Journal of Financial Economics, Vol. 82, pp. 491-518.
Fama, E. (1980), “Agency problems and the theory of the firm”, Journal of Political Economy, Vol. 88, pp. 288-307.
Fee, E. and Hadlock, C. (2003), “Raids, rewards, and reputations in the market for managerial talent”, The Review of Financial Studies, Vol. 16, pp. 1315-1357.
Francis, B., Iftekhar, H., Park, J. and Qiang, W. (2015), “Gender differences in financial reporting decision making: evidence from accounting conservatism”, Contemporary Accounting Research, Vol. 32, pp. 1285-1318.
Franks, J. and Mayer, C. (2003), “Governance as a source of managerial discipline”, in Firms' Investment and Finance Decisions: Theory and Empirical Methodology, Edward Elgar Publishing, pp. 253-269, Chapter 10.
Gibbons, R. and Murphy, K. (1992), “Optimal incentive contracts in the presence of career concerns: theory and evidence”, Journal of Political Economy, Vol. 100, pp. 468-505.
Gilson, S. (1989), “Management turnover and financial distress”, Journal of Financial Economics, Vol. 25, pp. 241-262.
Graham, J., Harvey, C. and Rajgopal, S. (2005), “The economic implications of corporate financial reporting”, Journal of Accounting and Economics, Vol. 40, pp. 3-73.
Gunning, R. (1952), The Technique of Clear Writing, McGraw-Hill, New York.
Guo, L. and Masulis, R. (2015), “Board structure and monitoring: new evidence from CEO turnovers”, Review of Financial Studies, Vol. 28, pp. 2770-2811.
He, J. and Tian, X. (2013), “The dark side of analyst coverage: the case of innovation”, Journal of Financial Economics, Vol. 109 No. 3, pp. 856-878.
Henry, E. and Leone, A. (2016), “Measuring qualitative information in capital markets research: comparison of alternative methodologies to measure disclosure tone”, The Accounting Review, Vol. 91, pp. 153-178.
Henry, E. (2008), “Are investors influenced by how earnings press releases are written?”, Journal of Business Communication, Vol. 45, pp. 363-407.
Hermalin, B. and Weisbach, M. (2007), Transparency and Corporate Governance, Working Paper, NBER.
Hermalin, B. and Weisbach, M. (2012), “Information disclosure and corporate governance”, The Journal of Finance, Vol. 67, pp. 195-233.
Holmström, B. (1999), “Managerial incentive problems: a dynamic perspective”, The Review of Economic Studies, Vol. 66, pp. 169-182.
Huang, X.S. and Sun, L. (2017), “Managerial ability and real earnings management”, Advances in Accounting, Vol. 39, pp. 91-104.
Huang, X., Teoh, S. and Zhang, Y. (2014), “Tone management”, The Accounting Review, Vol. 89, pp. 1083-1113.
Hutton, A., Miller, G. and Skinner, D. (2003), “The role of supplementary statements with management earnings forecasts”, Journal of Accounting Research, Vol. 41, pp. 867-890.
Jaggi, B. and Lee, P. (2002), “Earnings management response to debt covenant violations and debt restructuring”, Journal of Accounting, Auditing and Finance, Vol. 17 No. 4, pp. 295-324.
Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
Kaplan, S. and Reishus, D. (1990), “Outside directorships and corporate performance”, Journal of Financial Economics, Vol. 27, pp. 389-410.
Kartik, N. (2009), “Strategic communication with lying costs”, Review of Economic Studies, Vol. 76, pp. 1359-1395.
Kempf, A., Ruenzi, S. and Thiele, T. (2009), “Employment risk, compensation incentives, and managerial risk taking: evidence from the mutual fund industry”, Journal of Financial Economics, Vol. 92, pp. 92-108.
Khurana, I.K., Moser, W.J. and Raman, K.K. (2018), “Tax avoidance, managerial ability, and investment efficiency”, Abacus, Vol. 54, pp. 547-575.
Kim, E.H. and Purnanandam, A. (2014), “Seasoned equity offerings, corporate governance, and investments”, Review of Finance, Vol. 18 No. 3, pp. 1023-1057.
Koester, A., Shevlin, T. and Wangerin, D. (2017), “The role of managerial ability in corporate tax avoidance”, Management Science, Vol. 63, pp. 3285-3310.
Koh, K. (2011), “Value or glamour? An empirical investigation of the effect of celebrity CEOs on financial reporting practices and firm performance”, Accounting and Finance, Vol. 51, pp. 517-547.
Li, X., Low, A. and Makhija, A. (2017), “Career concerns and the busy life of the young CEO”, Journal of Corporate Finance, Vol. 47, pp. 88-109.
Li, F. (2008), “Annual report readability, current earnings, and earnings persistence”, Journal of Accounting and Economics, Vol. 45, pp. 221-247.
Lo, K., Ramos, F. and Rogo, R. (2017), “Earnings management and annual report readability”, Journal of Accounting and Economics, Vol. 63, pp. 1-25.
Loughran, T. and McDonald, B. (2011), “When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks”, The Journal of Finance, Vol. 66, pp. 35-65.
Loughran, T. and Ritter, J.R. (1997), “The operating performance of firms conducting seasoned equity offerings”, The Journal of Finance, Vol. 52 No. 5, pp. 1823-1850.
Lundholm, R., Rogo, R. and Zhang, J. (2014), “Restoring the tower of babel: how foreign firms communicate with US investors”, The Accounting Review, Vol. 89, pp. 1453-1485.
Luo, Y. and Zhou, L. (2017), “Managerial ability, tone of earnings announcements, and market reaction”, Asian Review of Accounting, Vol. 25, pp. 454-471.
Marquez-Illescas, G., Zebedee, A. and Zhou, L. (2018), “Hear me write: does CEO narcissism affect disclosure?”, Journal of Business Ethics, pp. 1-17.
Marty, T., Vanstone, B. and Hahn, T. (2020), “News media analytics in finance: a survey”, Accounting and Finance, Vol. 60, pp. 1385-1434.
Myers, S.C. and Majluf, N.S. (1984), “Corporate financing and investment decisions when firms have information that investors do not have”, Journal of Financial Economics, Vol. 13 No. 2, pp. 187-221.
Park, J., Ko, C.Y., Jung, H. and Lee, Y.-S. (2015), “Managerial ability and tax avoidance: evidence from Korea”, Asia-Pacific Journal of Accounting and Economics, Vol. 23 No. 4, pp. 449-477.
Patelli, L. and Pedrini, M. (2014), “Is the optimism in CEO's letters to shareholders sincere? Impression management versus communicative action during the economic crisis”, Journal of Business Ethics, Vol. 124, pp. 19-34.
Porter, M. (1992), “Capital disadvantage: America's failing capital investment system”, Harvard Business Review, Vol. 70, pp. 65-82.
Prior, D., Surroca, J. and Tribó, J. (2008), “Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility”, Corporate Governance: An International Review, Vol. 16, pp. 160-177.
Roychowdhury, S. (2006), “Earnings management through real activities manipulation”, Journal of Accounting and Economics, Vol. 42 No. 3, pp. 335-370.
Spiess, K.D. and Affleck-Graves, J. (1995), “Underperformance in long-run stock returns following seasoned equity offerings”, Journal of Financial Economics, Vol. 38 No. 3, pp. 243-267.
Srivastava, A. (2013), “Do CEOs possess any extraordinary ability? can those abilities justify large CEO pay?”, Asia-Pacific Journal of Accounting and Economics, Vol. 20 No. 4, pp. 349-384.
Subramanian, R., Insley, R. and Blackwell, R. (1993), “Performance and readability: a comparison of annual reports of profitable and unprofitable corporations”, Journal of Business Communication, Vol. 30, pp. 49-61.
Sweeney, A.P. (1994), “Debt-covenant violations and managers' accounting responses”, Journal of Accounting and Economics, Vol. 17 No. 3, pp. 281-308.
Teoh, S.H., Welch, I. and Wong, T.J. (1998), “Earnings management and the underperformance of seasoned equity offerings”, Journal of Financial Economics, Vol. 50 No. 1, pp. 63-99.
Verrecchia, R. (2001), “Essays on disclosure”, Journal of Accounting and Economics, Vol. 32, pp. 97-180.
Wade, J.B., Porac, J.F., Pollock, T.G. and Graffin, S.D. (2006), “The burden of celebrity: the impact of CEO certification contests on CEO pay and performance”, Academy of Management Journal, Vol. 49 No. 4, pp. 643-660.
Weisbach, M.S. (1988), “Outside directors and CEO turnover”, Journal of Financial Economics, Vol. 20, pp. 431-460.
Yan, Y., Xiong, X., Meng, G. and Zou, G. (2019), “Uncertainty and IPO initial returns: evidence from the tone analysis of China's IPO prospectuses”, Pacific-Basin Finance Journal, Vol. 57, pp. 1-22.
Yuan, Y., Tian, G., Lu, L. and Yu, Y. (2017), “CEO ability and corporate social responsibility”, Journal of Business Ethics, pp. 1-21.
Zhao, X. (2005), “Exit decisions in the US mutual fund industry”, Journal of Business, Vol. 78, pp. 1365-1401.