Earnings Press Research Articles

Limited attention, statement of cash flow disclosure, and the valuation of accruals

We test for the effect of limited attention on the valuation of accruals by comparing the immediate and long-term market reactions to earnings announcements between a subsample of firms that disclose only the balance sheet with a subsample of firms that disclose both the balance sheet and the statement of cash flows (SCF) in the earnings press release. Information about accruals generally can be inferred from comparative balance sheets, but the availability of the SCF makes accruals more salient and easier to process for investors with limited attention. Controlling for potential additional information and endogeneity of SCF disclosure, we find strong evidence that SCF disclosure enables more efficient pricing of accruals. Further analyses using a proxy for investor sophistication suggest that when SCF is absent from the earnings press release, less sophisticated investors fail to discount accruals but sophisticated investors do.

Reading Managerial Tone: How Analysts and the Market Respond to Conference Calls

Conference call tone predicts future earnings and uncertainty. “Tone disappointment” (excessive negativity) predicts more strongly than “tone delight” (excessive positivity). However, analysts and investors respond more quickly to delight than disappointment. Consequently, stock prices drift downward after their initial reaction to tone disappointment. Tone surprises move stock prices more in those firms where tone surprise predicts earnings and uncertainty more strongly. These results hold even after controlling for negativity of words in the earnings press release, analyst expectations, the firm’s recent performance, and CEO fixed effects. Together, these coherent results suggest that market participants distill value-relevant information from conference calls.

Pro forma disclosure practices of firms applying IFRS

Purpose – The purpose of this paper is empirically investigate the pro forma disclosure behavior of US-listed foreign firms applying International Financial Reporting Standards (IFRS). Design/methodology/approach – The annual earnings press releases of US-listed foreign firms on the New York Stock Exchange are analyzed to compare the effect that reporting standard (specifically IFRS) has on pro forma disclosure frequency, disclosure characteristics and benchmarking. Findings – US-listed foreign firms applying IFRS report pro forma disclosures more frequently than firms using the USA’s generally accepted accounting principles (GAAP), but less opportunistically. Originality/value – This paper extends Epping and Wilder’s (2011) study and contributes to the pro forma disclosure literature by providing a cross-country analysis of non-GAAP disclosure based on reporting standard (IFRS or US GAAP). Understanding the non-GAAP disclosure of firms applying IFRS is useful to investors and regulators, as more countries adopt IFRS.

Almost-Cheap Talk in Earnings Press Releases: Textual Tone and Price Sensitivity of Managerial Portfolios

Earnings press releases, as a timely vehicle for communicating a firm's performance to third parties, can be used by managers to influence the perception of the firm's achievements. Taking the stock price reaction to the tone of earnings press releases at earnings announcements into account, we argue that equity-based incentives induce managers to inflate the tone. We further posit that the impact of tone on the abnormal stock returns at the earnings announcements depends on the magnitude of the equity-based incentives. Based on over 26,000 earnings press releases of S&P1500 firms between 2004Q4 and 2012Q4, we find that the tone of earnings press releases tends to be more positive when the managerial portfolio value is more closely tied to the firm's stock price. We also find that investors react proportionally less to the tone as managers' equity incentives increase.

Priority Dissemination of Public Disclosures

ABSTRACTThis study examines the unintended effects of a pre-Reg FD practice that gave a broad group of sophisticated market participants 15-minute earlier access to all corporate press releases than the general public. We find that roughly one-eighth of the price discovery to earnings announcements issued during regular trading hours was due to privileged access to information in earnings press releases, with the 15-minute priority dissemination contributing to just over 50 percent of price discovery from all privileged access. In addition, we find that transient institutions benefited from priority dissemination, especially when the earnings contained good news. Finally, consistent with economic theory, we find that intraday bid-ask spreads decreased post-Reg FD for firms that had sufficient market liquidity to allow trading opportunities during the 15-minute window. Our study has implications for current discussions on whether preferential information distribution by firms and information intermediaries creates an uneven playing field among investors.Data Availability: The data used in this study are available from the public sources identified in the paperJEL Classifications: D82; G14; K22; M45.

Qualitative Disclosure and Changes in Sell‐Side Financial Analysts' Information Environment

AbstractWe examine a routine and timely disclosure, earnings press releases, to determine the extent to which several novel qualitative elements of such disclosures are associated with changes in sell‐side financial analysts' information environment. Using a comprehensive set of GARCH‐based (generalized autoregressive conditional heteroscedasticity) proxies, we examine how disclosure readability's components, across‐document textual similarity, and within‐document lexical diversity alter analysts' information environment. We find that readability in the form of shorter sentences, textual similarity, and lexical diversity are strongly related to decreases in analysts' uncertainty. Further, shorter sentences and lexical diversity improve both public and private information precision, whereas similarity affects solely analysts' private information precision. While the GARCH‐based proxies allow us to alleviate concerns regarding potentially spurious inferences (Sheng and Thevenot 2012), we note as a caveat that such an estimation restricts our inferences to large, stable, and heavily followed firms. These findings should be of interest to analysts who may wish to explore the latent information contained within the qualitative elements of disclosure, regulators who direct the form and content of disclosure, and academics who study the use (and possible misuse) of various forms of information and its presentation.

Building a Safe Harbor for Whom? A Look at Cautionary Disclaimers and Investors' Reactions to Forward-Looking Statements

We examine investor perceptions of forward-looking statements in the presence and absence of cautionary disclaimers about forward-looking statements. Using two experiments, we first show that nonprofessional investors are largely credulous of forward-looking statements when a cautionary statement is omitted from an earnings press release. In addition, although including a cautionary disclaimer lowers their explicit perceptions of whether they can rely on the information in the press release, investors’ valuation judgments do not indicate a significant reduction in actual reliance. In Experiment 2, we explore additional ways to increase the impact of cautionary disclaimers, and we find that cautionary disclaimers which discuss specific risks at the end of a disclosure lead to the greatest reduction in investors’ explicit perceptions of reliability. However, we again find cautionary disclaimers to be much less effective in reducing actual reliance compared to their impact on investors’ beliefs about reliance. As such, our results raise questions about the merit of granting (denying) safe harbor to management on the basis of having provided (omitted) cautionary disclaimers that do little to induce caution among investors.

Tips and Tells from Managers: How Analysts and the Market Read between the Lines of Conference Calls

Conference call tone predicts future earnings and uncertainty. “Tone disappointment” (excessive negativity) predicts more strongly than “tone delight” (excessive positivity). However, analysts and investors respond more quickly to delight than disappointment. Consequently, stock prices drift downward after their initial reaction to tone disappointment. Tone surprises move stock prices more in those firms where tone surprise predicts earnings and uncertainty more strongly. These results hold even after controlling for negativity of words in the earnings press release, analyst expectations, the firm’s recent performance, and CEO fixed effects. Together, these coherent results suggest that market participants distill value-relevant information from conference calls.

Managerss Use of Forward and Non-Forward-Looking Narratives in Earnings Press Releases

Managerss Use of Forward and Non-Forward-Looking Narratives in Earnings Press Releases

The Effects of Regulation FD on Informal and Institutionalized Leakages of Information in Earnings Press Releases

This study examines the unintended effects of a pre-Reg FD practice that gave a broad group of sophisticated market participants 15-minute earlier access to all corporate press releases than the general public. We find that this priority dissemination practice contributed to 22 percent of the overall price discovery due to overall exclusionary access prior to public release of earnings, and that its impact increased to over 50 percent for firms announcing earnings during regular trading hours. In addition, we find that transient institutions benefitted from priority dissemination, especially when the earnings contained good news. Finally, consistent with economic theory, we find that intraday bid-ask spreads decreased post-Reg FD for firms that had sufficient market liquidity to allow trading opportunities during the 15-minute window. Our study has implications for current discussions on whether preferential information distribution by firms and information intermediaries creates an uneven playing field among investors.

Managers set the tone: Equity incentives and the tone of earnings press releases

Abstract Earnings press releases, as a timely vehicle for communicating a firm’s performance to third parties, can be used by managers to influence the perception of the firm’s achievements. Taking the stock price reaction to the tone of earnings press releases at earnings announcements into account, we argue that equity-based incentives induce managers to inflate the tone. We further posit that the impact of tone on the abnormal stock returns at the earnings announcements depends on the magnitude of the equity-based incentives. Based on over 26,000 earnings press releases of S&P1500 firms between 2004Q4 and 2012Q4, we find that the tone of earnings press releases tends to be more positive when the managerial portfolio value is more closely tied to the firm’s stock price. We also find that investors react proportionally less to the tone as managers’ equity incentives increase.

Voluntary Disclosure of Press Releases and the Importance of Timing: A Comparative Study of the UK and Spain

This paper investigates the effect of proprietary costs in relation to managers’ decisions to disclose information. Further, we look into the impact of factors affecting the timing of disclosures in a comparative study of Spain and the UK. Our investigation focuses on management earnings press releases discussing annual results. These press releases allow managers great discretion in terms of the decision to release and the timing. Our results show that the potential for growth is negatively related to the likelihood of a company voluntarily issuing a press release. Moreover, once the decision to voluntarily disclose is made, the timing is also relevant. We find significant differences in the timing of press releases between the two countries examined in this study. Also, significant differences between companies having or not having an investor relations department are evident. The existence of an investor relations function in the company seems to have a different impact depending on the country. Interestingly, even though corporate performance seems not to have a direct effect on the timing of the press release, this factor is moderated by the country where companies operate.

What Do Forward and Backward-Looking Narratives Add to the Informativeness of Earnings Press Releases?

Narrative disclosure provides an opportunity for managers to directly discuss their firms’ future (i.e., forward-looking disclosure) or to provide information about the past that has future implications (i.e., non-forward-looking disclosure). Managers can potentially use these types of disclosures to communicate differences in their expectations and beliefs regarding future and past performance to investors. Consistent with this conjecture, we first find that managers’ use of non-forward-looking narrative disclosure is more responsive to changing economic conditions than is their use of forward-looking narrative disclosure. We then examine how forward and nonforward-looking narrative disclosures add to the informativeness of earnings press releases. We find that the market’s response to non-forward-looking narrative disclosure news is more than eight times larger in economic magnitude than that for forward-looking news. To explain these findings, further analysis suggests that non-forward-looking narrative disclosures are more informative because they are more precise and predict future earnings better. Overall, in light of regulatory pressures for enhanced forward-looking disclosures, our findings underscore the importance of non-forward-looking narrative disclosures as a relevant source of information for market participants.

Restoring the Tower of Babel: How Foreign Firms Communicate with U.S. Investors

ABSTRACT: We examine the readability of text and the use of numbers in the annual filings and earnings press releases of foreign firms listed on U.S. stock exchanges. We find that foreign firms generally write clearer text and present relatively more numerical data than their U.S. firm counterparts. More importantly, we find that the readability of the text and use of numbers increases as the foreign firms get geographically further from the U.S. It also increases as the foreign firm's home country has greater differences in accounting standards or investor protection laws relative to the U.S. Further corroborating our results, we also find that these communication efforts are partially successful. Within a country, firms that produce relatively more readable disclosures attract relatively more U.S. institutional ownership. Collectively, our results suggest that foreign firms are responding to a perceived reluctance on the part of U.S. investors to own them and attempt to lower the investors' information disadvantage or psychological distance by providing clearer and more concrete disclosures.

Tone Management

ABSTRACT We investigate whether and when firms manage the tone of words in earnings press releases, and how investors react to tone management. We estimate abnormal positive tone, ABTONE, as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such as performance, risk, and complexity. We find that ABTONE predicts negative future earnings and cash flows, is positively associated with upward perception management events, such as, just meeting/beating thresholds, future earnings restatements, SEO, and M&A, and is negatively associated with a downward perception management event, stock option grants. ABTONE has a positive stock return effect at the earnings announcement and a delayed negative reaction in the one and two quarters afterward. Balance sheet constrained firms and older firms are more likely to employ tone management over accruals management. Overall, the evidence is consistent with managers using strategic tone management to mislead investors about firm fundamentals.

Are Seemingly Self-Serving Attributions in Earnings Press Releases Plausible? Empirical Evidence

ABSTRACTSeemingly self-serving attributions either attribute favorable performance to internal causes (enhancing attributions) or poor performance to external causes (defensive attributions). Managers presumably provide such attributions in earnings press releases to heighten (dampen) investors' perceptions of the persistence of good (bad) earnings news, thereby increasing (decreasing) the market reward (penalty) for good (bad) earnings news. Building on attribution theory and prior research on earnings commonality, this study investigates cross-sectional differences in investors' responses to quarterly earnings press releases that contain seemingly self-serving attributions. Using a random sample of press releases from 1999 to 2005, we find that firms that provide defensive attributions to explain earnings disappointments experience less severe market penalties when: (1) more of the their industry peers also release bad news, and (2) their earnings share higher commonality with industry- and market-level earnings. On the other hand, firms that provide enhancing attributions to explain good earnings news reap greater market rewards when: (1) more of their industry peers release bad news, and (2) their earnings share lower commonality with industry- and market-level earnings. Collectively, our results demonstrate that investors neither ignore seemingly self-serving attributions nor accept them at face value, but rely on industry- and firm-specific information to assess their plausibility.Data Availability: Data are publicly available from the sources identified in the text.

Patterns of Language Use in Accounting Narratives and Their Impact on Investment-Related Judgments and Decisions

ABSTRACTRecent research has examined the role of accounting narratives on investors' judgments and decisions. This study extends this line of inquiry by examining the effects of language categories on investors' judgments and decisions—the notion that narratives written with different predicates (verbs versus adjectives/nouns) will have a differential effect on investors. We use a language classification system, the Linguistic Category Model (LCM), to identify linguistic categories that vary on the dimension of abstractness/concreteness. First, the validity of the LCM in an accounting context is tested by analyzing quarterly earnings press releases. Results show that the language in press releases is more concrete (abstract) when the associated financial information is positive (negative). Second, an experiment to examine the effect of language categories on investors' judgments and decisions is conducted. The findings indicate that investors are least (most) likely to invest when a negatively (positively) valenced narrative is written concretely.

Pro forma earnings disclosure: the effects of non-GAAP earnings and earnings-before on investors’ information processing

Research on pro forma earnings disclosure usually does not distinguish between different types of pro forma earnings. However, non-GAAP earnings and earnings-before (EB) metrics such as the EBIT fit the conventional perception of pro forma earnings but offer varying degrees of flexibility to management in pursuing strategic reporting motives. This study presents the results of an experiment that builds upon Maines and McDaniel’s (Account Rev 75(2):179–207, 2000) framework and analyzes if variations in the use and combination of pro forma earnings information affect whether nonprofessional investors acquire (pro forma) earnings information, and how this information is evaluated, and weighted when making investment-related judgments. Our results indicate that a “pure” non-GAAP disclosure increases investors’ evaluation of a company’s earnings performance compared to all other reporting strategies. However, we also find that nonprofessional investors consider non-GAAP information strategically motivated and thus weight it less heavily in arriving at investment-related judgments. Overall, we find that investors’ judgments (i.e., the overall favorability of the earnings announcement and the company’s attractiveness as an investment) are highest when the earnings press release contains the non-GAAP earnings and the EB measure. This has important implications for behavioral accounting theory as well as corporate practice and policy-making.

The Relation between Earnings Management and Pro Forma Reporting

Managers have a variety of tools at their disposal to influence stakeholder perceptions. Earnings management and the strategic reporting of non-GAAP (pro forma) performance metrics are just two of the many choices on the menu. We investigate how managers’ use of other menu items can influence the likelihood that they will disclose pro forma earnings. Specifically, we explore how (1) prior earnings management, current-period (2) operating performance, (3) real earnings management, and (4) accruals management influence the probability that a company will disclose an adjusted earnings metric in its earnings press release and the likelihood that it will do so aggressively. Based on a sample of hand-collected pro forma earnings disclosures, we find that companies that have used up their accruals in prior periods and that engage in less current-period earnings management are more likely to disclose pro forma earnings and to do so aggressively. Moreover, we find some evidence that companies using more real earnings management and with better current operating performance are less likely to report aggressive pro forma numbers. These results suggest that while more past earnings management is consistently positively associated with aggressive pro forma reporting, we find evidence of a substitute relation between aggressive pro forma reporting and both abnormal accruals and real earnings management. Finally, we find evidence that investors appear to understand these tradeoffs as they discount pro forma disclosures in the presence of higher levels of prior earnings management.

The Annual Earnings Press Release's Dual Role: An Examination of Relationships with Local and National Media Coverage and Reputation

This study analyzed annual earnings press releases and local and national newspaper coverage of those earnings for 207 of Fortune's America's Most Admired companies to explore intermedia agenda setting and relationships with reputation. The annual earnings press releases were found to have the greatest relationship with the positive content in local media coverage and negative content in national media coverage. The reputation, as determined by sophisticated investors, was related to the neutrality of the annual earnings press release in combination with the length of local and national newspaper coverage.