Disclosure Tone Research Articles

Validating the impact of accounting disclosures on stock market: A deep neural network approach

Firms disclose information either voluntarily or due to the regulator's mandatory requirements, and such disclosures form good sources to know the prospects of a firm. Information in the disclosures and analysts' opinions influence investor-trading behavior, and consequently, affects the asset prices. As sentiments factored in disclosures are a source of market action, this study aims to capture the sentiments from disclosure information to assess asset prices' impact. The paper adopts a deep neural network-based prediction model for conducting sentiment analysis on heterogeneous datasets. We construct a sentiment simulation model of voluntary disclosures to know whether the managers can use the market sentiment as a strategic input to boost market performance by suitably drafting the tone and content of disclosures without compromising their quality and veracity. The Deep Neural Networks with LSTM algorithm is found to outperform the Deep Neural Networks with RNN and other baseline machine learning classifiers in terms of predictive accuracy of the NSE NIFTY50. The variable importance computed also validates that market news, combined with historical indicators, predicts the stock market trend closer to the actual trend.

Audit committee disclosure tone and earnings management

PurposeThis paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management.Design/methodology/approachThe authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms.FindingsThe analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone.Research limitations/implicationsOverall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality.Practical implicationsOverall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality.Originality/valueThough the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.

CSR or social impression management? Tone management in CSR reports

PurposeThe purpose of this paper is to investigate to what extent corporate social responsibility (CSR) is used as a symbolic strategy of greenwashing. Analyses focus on the relationship between CSR and disclosure tone management practice in sustainable reports derived from social impression management incentives.Design/methodology/approachThis study is based on a sample of French listed firms (SBF 120) over a seven-year period (2010–2016), i.e. 539 firm-year observations.FindingsMultivariate analysis indicates a significant relationship between CSR and disclosure tone management. The obtained results show that firms that are less concerned with tone management in sustainable reporting process consider more socially responsible issues. Findings support the socially substantive initiatives and the transparency perspective of CSR.Research limitations/implicationsThe negative association between CSR and tone management highlights the firm’s transparency. However, there could be other discretionary practices which may determine impression management strategies. Thus, future research may consider other discretionary behavior associated with CSR to mislead users.Practical implicationsAll actors (government, green-association, investors, etc.) interested in CSR and greenwashing issues have to bring initiatives to reinforce the monitoring and reporting procedures.Originality/valueThis study investigates the association between CSR and disclosure tone management for the French context since the specificity of its regulatory framework of CSR disclosure. Thus, corporate narrative reporting users may be required to consider impression management practices (i.e. tone management) and read between the lines.

Determinants of the disclosure tone of poverty alleviation information: the case of A-share listed companies in China’s Shanghai and Shenzhen stock exchange

ABSTRACT Companies’ disclosing information of targeted poverty alleviation in China has become a referee for investors to judge the morality of the corporate management and influenced the decision-making of investment. According to analysing the sample of A-share listed companies in China’s Shanghai and Shenzhen during 2016–2019, this article tests the effects on practices (Investment of Poverty Alleviation) via theories (Information Disclosure). The empirical result shows that: First, once companies invest more in targeted poverty alleviation, they will significantly increase their active tone, such as active participation and high involvements, to disclose the relevant information. Second, compared with private enterprises, state-owned enterprises will have more active tones in disclosing the information on targeted poverty alleviation. Nevertheless, with the non-profit feature and its social responsibility of state-owned enterprises, results reveal the negative correlations between increasing expenditures in poverty alleviation and its information disclosure.

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

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.

Linguistic tone of management discussion and analysis disclosures and the municipal debt market

PurposeAs the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors investigate several municipal debt market consequences of linguistic tone within these disclosures.Design/methodology/approachThe authors textually analyze municipal MD&As with Linguistic Inquiry and Word Count (LIWC) software and develop narrative tone measures based on existing financial-specific dictionaries. Using a final sample of 446 municipal bond issuances from 2012 to 2016, the authors modify the current bond regression models to examine the association between MD&A disclosure tone and future bond interest costs or rating disagreements.FindingsThis study’s empirical analysis suggests that more negative MD&A tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.Practical implicationsOverall, the evidence implies that municipal bond stakeholders use the information in narrative disclosures when evaluating risk, but that the qualitative nature can introduce differences in interpretation between users. Furthermore, additional training in MD&A writing and further standard guidance in MD&A disclosures could improve the MD&A's informativeness for bond market decision-making and state-level monitoring.Originality/valueThis study is first to incorporate narrative tone measures into bond models in a governmental context.

Does managerial ability affect disclosure? Evidence from earnings press releases

PurposePrior research shows that managers with lower ability release less accurate management earnings forecasts and have more earnings restatements, lower earnings persistence and lower quality accruals estimations. Yet, whether the impact of managerial ability (MA) on financial reporting can be extended to the narrative section of firms' financial disclosures needs to be theoretically and empirically examined. The authors theorize in this paper that managers with low ability opportunistically inflate the tone to increase outsiders' perceptions of their ability. The authors also examine the relation between MA and the informativeness of tone to predict future firm performance and explain investors' reaction at earnings announcement.Design/methodology/approachThe authors collect 24,000 earnings press releases of 1,149 distinct firms between 2004 and 2013. Content analysis is used to proxy the tone of the disclosures. The authors use the score developed by Demerjian et al. (2012) to measure MA. The authors then employ panel data regressions to examine the impact of MA on disclosure tone.FindingsThe authors find that low-ability managers inflate the disclosure tone to positively influence labor market's perceptions about their ability. This effect is magnified for younger and shorter-tenured managers, for firms with more intense monitoring and during bear markets. The authors also find that the tone of earnings press releases of low-ability managers results in a lower stock price reaction. Supplementary analyses show that the results do not only hold for the tone, but also can be extended to other linguistic features such as the numerical intensity and the readability of earnings press releases. The results are robust to alternative library specifications and other corporate disclosures such as CEO letters to shareholders or 10-K filings.Research limitations/implicationsThe paper shows that managers worry about how firm performance influences the labor market assessment of their ability. In particular, the authors find that managers of low ability are willing to opportunistically manipulate the content of corporate disclosures to improve this perception and build their reputation.Originality/valueThe authors contribute by providing theoretical and empirical evidence on how managers attempt to steer assessments of their ability by manipulating corporate disclosures. Consistent with prior business research suggesting that one's ability is a key feature that affects managers' propensity to engage in ethical practices, such as tax avoidance or manipulation of financial information, this study shows that less able managers tend to inflate the tone of the earnings announcements and that this ability-driven bias is likely to be magnified by career concerns.

A Tone Analysis of the Non-Financial Disclosure in the Automotive Industry

This study’s purpose is twofold. On the one hand, it analyzes the relationship between the profitability of firms and the tone of nonfinancial disclosures; on the other hand, it tests the relationship between the environmental, social, and governing (ESG) performance of firms and the tone of nonfinancial disclosures on the automotive sector under two different and competing approaches, which are incremental information and impression management. The sample is composed of 68 nonfinancial reports issued by 17 automotive organizations between the years 2016 and 2020. Data analysis proceeded in two stages. First, a content analysis was performed to assess the linguistic attributes of the nonfinancial disclosure. Second, an inferential regression analysis was performed to test the hypothesized associations between firms’ performance and tone of their disclosures. The results of this study are aimed at providing evidence of the determinants of the verbal tone in the corporate nonfinancial reporting in a specific industry.

Accounting Disclosure Tone and Conservative Debt Policy Empirical Study on the Egyptian Companies Listed in Stock Exchange

The research aims to study the relation between accounting disclosure tone (Positive tone – Negative tone – Net tone) and conservative debt policy (the low-leverage puzzle). The study investigates hypotheses on a sample of 60 Egyptian firms listed in Stock Exchange in the period (2013-2019). Using content analysis and logistic regression to analyze the formulation of news found in financial reports and periodic disclosures published on the Egyptian Stock Exchange. The results indicate a negative and significant relation between positive disclosure tone and conservative debt policy, meaning that with an increase (decrease) in the disclosure tone, firms are less (more) conservative in debt policy. This result is consistent with (Malmendier et al., 2011). The results also indicate that there is a positive and significant relation between (Negative - net) disclosure tone and conservative debt policy. This result can be explained that managers may retain more cash for future investment than their rational counterparts and are reluctant to use external financing. This result is consistent with (Malmendier et al., 2011).

Annual report readability and the cost of equity capital

Using a large panel of U.S. public firms, we examine the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors' ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. In addition, we hypothesize and test whether the nature of the relation between readability and cost of capital depends on the tone of 10-K filings. Our results show that the effect of annual report complexity on cost of equity is greater when disclosure tone is more negative or more ambiguous. We also find that the effect of annual report readability on cost of equity capital depends on the degree of stock market competition, level of institutional investors' ownership, and analyst coverage.

Governance Vis-à-Vis Investment Efficiency: Substitutes or Complementary in Their Effects on Disclosure Practice

Prior studies provide evidence that both corporate governance and corporate investment efficiency affect corporate disclosure practice. In this paper, we examine their joint effect on disclosure. In particular, we examine whether corporate governance quality and corporate investment efficiency act as substitutes or complements in their impact on narrative disclosure. We collect disclosure scores from Lancaster University’s Corporate Financial Information Environment (CFIE) website for a sample of non-financial UK companies for the period 2007–2014. We regress measures of corporate governance and corporate investment efficiency on two different proxies of disclosure practice (performance commentaries disclosure and the tone of narrative disclosure). Consistent with prior studies, we find that both governance and investment efficiency affect disclosure. We contribute to narrative disclosure studies in two crucial respects. First, we provide empirical evidence that governance and investment efficiency has a complementary effect on performance commentaries disclosure. Second, we contribute to the disclosure tone literature by providing empirical evidence that both governance and investment efficiency have a substitution effect on the tone of narrative disclosure.

You Have Been Forewarned! The Effects of Risk Management Disclosures and Disclosure Tone on Investors’ Judgments

SEC risk disclosure standards require the standalone disclosure of risk factors and do not permit the concurrent disclosure of risk management information. This differs from requirements in regimes such as Germany. The SEC is considering mandating risk management disclosures. We experimentally examine how the disclosure of risk management information alongside risks and the risk disclosure tone used influence investors’ stock valuation judgments, with and without materialization of the disclosed risk. We find that without risk materialization, investors provide lower (higher) stock valuations when a positive versus negative disclosure tone is used in the absence (presence) of risk management disclosures. With risk materialization, a positive tone leads to lower stock valuations only in the presence of risk management disclosures. Our findings have implications for managers and regulators, as investors may penalize firms that make good faith risk disclosures, even if these risks have been properly managed.

SPACs and Forward-Looking Disclosure: Hype or Information?

Regulators and legal scholars express concern that SPAC growth results from a disclosure-regulation loophole and that forward-looking disclosure by SPACs can mislead investors. We examine SPAC voluntary disclosure and associated outcomes. SPACs offer a means for firms to become public, but, unlike IPOs, we find SPAC firms frequently provide forward-looking information (e.g., earnings forecasts). Measuring disclosure by tone, the existence of a forecast, forecasting intensity, and forecast growth rates, our results suggest that forward-looking disclosure in SPAC merger announcements does not mislead small investors. Disclosures containing more forecasts are associated with positive returns at the announcement. However, our disclosure measures are not associated with subsequent return reversals. More forecasts are related to positive subsequent return drift, lower redemption rates and bid-ask spreads, and more retail investor buying. We do not find evidence that forecasted sales or EBITDA growth rates are associated with return reversals. In fact, we find a positive relation between forecasted sales growth and returns around the first post-closing earnings announcement. Moreover, correlations between outcomes and disclosure tone are not significant, suggesting that hype, if present, does not sway investors. Our findings do not support the concern that SPACs take advantage of apparent exemption from prosecution under the 1933 Act to hype forward-looking disclosure to deceive shareholders.

Management’s and auditors’ disclosures of significant accounting estimates and the role of audit committees

We examine whether introducing the ISA 701 to improve audit reports has created spillover effects on the closely related management disclosures of significant accounting policies and estimates. Based on a sample of Swedish listed firms (2013–2018), we investigate the number of items and risk-related words in management disclosures, and how they relate to auditor disclosures of key audit matters (KAMs). We observe that since the introduction of the ISA 701, managers disclose more risk-related words, but this increase is significantly higher in firms with a separate audit committee on the board. Further, we discover that a positive relationship exists between managers’ and auditors’ disclosures in terms of the number of accounting items and risk factors. This correspondence is also greater for firms with audit committees. We also provide evidence for the positive effect of audit committees’ financial expertise on management disclosures. Additional analyses further investigate the determinants of KAM disclosures, reveal that a relationship exists concerning the uncertain tone of disclosures in firms with audit committees, and address any potential endogeneity related to the selection bias of firms with audit committees using the propensity score-matching technique.

International Earnings Announcements: Tone, Forward-looking Statements, and Informativeness

This paper examines two attributes of earnings press releases issued by firms cross-listed on U.S. stock exchanges: the tone and frequency of forward-looking statements. A more conservative tone and a greater proportion of forward-looking statements are often viewed as contributing to more credible disclosures. Our analysis indicates that culturally and institutionally more distant firms are generally less positive in their disclosures and include more forward-looking statements than U.S. firms. Further, we find that the tone and frequency of forward-looking statements of cross-listed firms’ earnings announcements are more informative than those of U.S. firms in predicting future firm performance, and this informativeness generally increases with the cultural and institutional distance of the home country from the U.S. In explaining market reaction to earnings announcements, tone informativeness in particular increases with the cultural distance of the home country from the U.S. Overall, in the context of home bias theory, we interpret our findings as suggesting that a cautious disclosure tone and more forward-looking information serve to mitigate potential home bias-related credibility and asymmetric information concerns arising from cultural and institutional distance.

Is the Tone of Risk Disclosures in MD&As Relevant to Debt Markets? Evidence from the Pricing of Credit Default Swaps*

ABSTRACTThis paper examines whether the tone of corporate textual disclosures related to risk and uncertainty conveys relevant information to the credit default swap (CDS) market. Prior studies largely focus on the amount of risk disclosures and provide inconclusive evidence on the usefulness of risk disclosures for investors in assessing firm risk. Using a large sample of textual risk disclosures in the Management's Discussion and Analysis (MD&A) section of 10‐K and 10‐Q filings, I predict and find that the change in CDS spreads over the three‐day window surrounding the 10‐K/Q filing date is positively associated with the pessimism of the language used in the risk disclosures. I conduct several analyses to show that the effect of the tone of risk disclosures is distinguishable from that of the amount of such disclosures. Cross‐sectional analyses reveal that the CDS market reaction to the tone of MD&A risk disclosures is more pronounced for reference entities closer to default, consistent with creditors' particular concern about downside risk. Further, the CDS market reacts more significantly to the tone of MD&A risk disclosures for reference entities with a weaker information environment. Overall, these results support the view that the tone of textual risk disclosures in MD&As has information content for investors in the CDS market in particular and debt markets in general. My findings improve the understanding of textual risk disclosures by showing that the tone and the amount of such disclosures have different implications for debt market investors' risk perceptions.

A review on textual analysis of corporate disclosure according to the evolution of different automated methods

Purpose The purpose of this paper is to give a comprehensive review and synthesis of automated textual analysis of corporate disclosure to show how the accuracy of disclosure tone has been incremented with the evolution of developed automated methods that have been used to calculate tone in prior studies. Design/methodology/approach This study have conducted the survey on “automated textual analysis of corporate disclosure and its impact” by searching at Google Scholar and Scopus research database after the year 2000 to prepare the list of papers. After classifying the prior literature into a dictionary-based and machine learning-based approach, this study have again sub-classified those papers according to two other dimensions, namely, information sources of disclosure and the impact of tone on the market. Findings This study found literature on how value relevance of tone is varied with the use of different automated methods and using different information sources. This study also found literature on the impact of such tone on market. These are contributing to help investor’s decision-making and earnings and returns prediction by researchers. The literature survey shows that the research gap lies in the development of methodologies toward the calculation of tone more accurately. This study also mention how different information sources and methodologies can influence the change in disclosure tone for the same firm, which, in turn, may change market performance. The research gap also lies in finding the determinants of disclosure tone with large scale data. Originality/value After reviewing some papers based on automated textual analysis of corporate disclosure, this study shows how the accuracy of the result is incrementing according to the evolution of automated methodology. Apart from the methodological research gaps, this study also identify some other research gaps related to determinants (corporate governance, firm-level, macroeconomic factors, etc.) and transparency or credibility of disclosure which could stimulate new research agendas in the areas of automated textual analysis of corporate disclosure.

It Ain’t Just What Funds Disclose (It's The Way That They Do It)

Financial disclosures provide more information than simply their regulated content. Disclosure tone and textual attributes affect firm performance, earnings persistence, stock volatility, capital costs, and retail investor behavior. But do these theories apply to mutual fund disclosures? In this Article, we examine the extent to which disclosure tone predicts fund risk and performance. Following Loughran & McDonald (2011), we develop customized dictionaries specific to mutual funds. We then introduce a novel sentiment scoring framework that generates a transparent sentence- and disclosure-level score for our sample of 132,326 mutual fund summary prospectuses (497k) from 2010-2018. Descriptive analysis validates our dictionary by showing meaningful and statistically significant differences across disclosure sections, CRSP categories, and time. Principal risk (PR) sections are more negative (and uniformly so) than investment strategy (IS) sections across time. Using a fixed-effects model, we demonstrate sentiment's predictive power on fund's return, volatility, and portfolio composition, conditional on sentiment’s relationship with readability. Our context-sensitive approach provides researchers and regulators with a tool to better assess not only what fund disclosures are saying, but how they say it. Further, our results reveal persistent differences in PR and IS estimated information signals that map onto content regulations and suggest a rich field for future research.

Disclosure tone management and labor unions

AbstractBy analyzing the influence of labor unions on the narrative content of corporate disclosures, we provide empirical evidence that managers deflate the tone of earnings press releases in order to convey to unions a less optimistic image of firm financial performance. We find that the tone of the qualitative information in earnings press releases is significantly less optimistic as the degree of unionization increases, and particularly when financial performance is strong. The results of quasi‐natural experiments suggest that labor unions causally affect the use of tone deflation, and the deflation is stronger during labor negotiations. Our findings also indicate that labor unions lead to a significant weakening of the signaling value of the tone of earnings press releases in predicting future performance.

Macroeconomic Uncertainty and Quantitative versus Qualitative Inputs to Analyst Risk Forecasts

ABSTRACTRisk forecasting is crucial for informed investment decision-making. Moreover, the salience of investment risk increases during economically uncertain times. In this paper, we study how sell-side analysts form expectations of firm risk, under different macroeconomic conditions (low versus high uncertainty) and by distinguishing between quantitative and qualitative information inputs. We find that analysts jointly consider quantitative and qualitative information, but that their reliance on qualitative information—in particular, disclosure tone—increases when macroeconomic uncertainty is high. We also find that analysts mostly rely on disclosure tone when it contradicts quantitative information. These findings highlight how narrative disclosures can provide context for quantitative information. Finally, we find that analysts' specific use of quantitative/qualitative information improves their forecasts as predictors of firm risk. Together, our results illuminate analysts' risk forecasting process—what information they use and how.JEL Classifications: G01; G11; G20; G24.