Investigating Abnormal Disclosure Tone in Corporate Narratives: Evidence from an Emerging Market

Abstract

This study aims to investigate abnormal disclosure tone levels (i.e., extent of management’s tone manipulation) in narrative disclosures of earnings press releases of Egyptian firms. Net disclosure tone is measured by applying manual textual analysis using the financial-domain wordlist of Henry (2008). Then, abnormal disclosure tone is estimated using the model proposed by Huang et al. (2014). Results show that net disclosure tone in the narratives of earnings press releases of firms in all industry sectors tend to be positive and optimistic. In addition, while estimating abnormal disclosure tone levels, using Huang et al (2014) model, it is found that firms that are more profitable, larger, with less growth opportunities and more business segments tend to provide more positive and optimistic tone in their narrative disclosures. Moreover, results provide evidence for the existence of levels of abnormal tone in the narrative disclosures of earnings press releases (both upward and downward tone management), indicating the existence of some levels of tone manipulation by management in the Egyptian firms’ disclosures. Firms in the materials and the real estate sectors are found to have higher levels of abnormal disclosure tone in their earnings press releases. This study contributes to the existing literature, by providing insights regarding management’s use of abnormal tone (i.e., Tone management) in the narrative disclosures of Egyptian firms, which is an unexplored area yet in the Egyptian market or any other emerging market.