CEO power, board oversight, and earnings announcement tone

Abstract

This study constructs a model of the determinants of earnings announcement tone in order to examine the impact of CEO power on earnings announcement tone. An interaction term between CEO power and board monitoring is used to test whether effective board oversight moderates the strength of the association between CEO power and earnings announcement tone. Following prior research, we measure earnings announcement tone as the spread in the proportion of positive and negative words in the announcements. CEO power is assessed across two dimensions: (1) expert power (CEO tenure) and (2) structural power (CEO-chairman duality). We use board independence, meeting frequency, and board meeting attendance to measure the effectiveness of board oversight. We find that earnings announcement tone is significantly positively associated with CEO tenure and CEO duality. The effect of CEO tenure is weaker when board oversight is stronger, especially when board members have higher reputation costs, whereas the effect of CEO duality is unchanged by board oversight mechanisms. The empirical evidence is broadly consistent with the notion that powerful CEOs use a more optimistic and aggressive tone in their earnings’ announcements and that stronger board oversight is effective in constraining overt aggressiveness in the earnings announcements issued by CEOs with longer tenure but not those issued by dual-role CEOs. The results are robust to several sensitivity tests. Finally, this study identifies CEO power and board oversight as previously unrecognized determinants of tone in earnings announcements.