Stock Price Crash Risk and the Managerial Rhetoric Channel: Evidence from Narrative R&D Disclosure

Abstract

This study proposes the managerial rhetoric channel, which is exploited as a vital conduit through which managers convey information to the investment community. Managerial narrative in corporate reports featuring technology and innovation disclosure activities is positively associated with one year ahead stock price crash risk. Moreover, the positive relation between managerial narrative and stock price crash risk is more pronounced for firms with powerful, more able, younger CEOs and CEOs with higher industry tournament incentives. The adverse impact of managerial narrative on future stock prices prevails among firms that face high competition and firms with lower anti-takeover provisions. Finally, this managerial rhetoric-crash relationship cannot be attenuated in the presence of stronger internal corporate governance.