Earnings Announcement Content as a Signal of Reliability

Abstract

We extend literature on the timing and quantitative content of earnings announcements (EAs), and consider whether managers use qualitative characteristics to relate the reliability of earnings information, relative to audit completion. We also examine if qualitative differences in EAs moderate investor reactions to the EA. Assessing the linguistic content of EA disclosures for uncertainty and readability on a sample of firms from 2004 to 2020, we hypothesize and find that EAs released early relative to audit completion convey lower reliability, measured by more uncertain and less readable language. For firms that do release early, the more uncertain and less readable the EA is the earlier they release. We also predict that such information is a more reliable, optimistic signal of future operations, and that a prior accounting restatement will increase uncertainty in EAs. We find that firms that restate financial reports from the prior year use more uncertain and less readable language in current year announcements. Finally, we examine the relevance of more or less certainty and readability through investor responses to EAs. When earnings news is unexpectedly good, there is a larger positive market response to earnings when those EAs use more certain and readable language. When the news is unexpectedly bad, there is a more negative market response to earnings when those EAs use more certain and readable language.