Textual tone in corporate financial disclosures: a survey of the literature

Abstract

This study reviews the research on the usefulness, determinants, and measurements of the textual tone of corporate financial disclosures. This review suggests that various stakeholders (e.g., investors, analysts, and auditors) use the tone of corporate financial disclosure to infer management’s private information on the company’s prospects, risks, firm value, and operational outcomes. The tone of corporate financial disclosure is jointly determined by a number of factors, including corporate operational characteristics (e.g., financial performance, size, growth, volatility), management opportunism (e.g., stock-based compensation, seasoned equity issuance, merger and acquisition, etc.), and management characteristics (e.g., optimistic tendency, CEO narcissism, CEO/CFO age, etc.). This study also summarizes the four major methods for measuring tone using textual analysis technologies. This study is the first review of the growing body of research on the determinants of the tone of corporate financial disclosure and the usefulness and measurement of such tone. It will be very useful to researchers, directors and officers, investors, and regulators around the world.