Managers’ Use of Language Across Alternative Disclosure Outlets: Earnings Press Releases versus MD&A*

Abstract

We use textual-analysis software to quantify the language used in earnings press releases and the corresponding Management Discussion and Analysis (MD&A) for approximately 13,000 firm quarters between 1998 and 2003. Analyzing two narrative disclosures in which managers describe firm performance for the same quarter allows us to examine managers’ use of language across alternative communication outlets. Our general prediction, which relies on prior literature suggesting that there is a greater market response to information disclosed in an earnings announcement press release versus an SEC filing, is that managers disclose less pessimistic language and more optimistic language in earnings press releases relative to the corresponding MD&A disclosures. We first document that firms exhibit significantly lower levels of pessimistic language and higher levels of optimistic language in earnings press releases relative to the MD&A. We then construct a measure of the proportion of total pessimistic language reported in an earnings press release relative to the corresponding MD&A and find this proportional measure is negatively associated with the intensity of managers’ strategic reporting incentives. In additional analyses, we find a negative association between the level of pessimistic language in the MD&A and future firm performance, controlling for pessimistic language in the corresponding earnings press release. This evidence supports our assertion that managers disclose pessimistic language in the MD&A that provides information incremental to that in the corresponding earnings press release. Overall, our results are consistent with managers’ use of alternative communication outlets as part of a strategy to influence the market’s response to information disclosed.