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Abstract:
We examine whether managers use linguistic style (i.e., optimistic and pessimistic tone) in earnings press releases to provide information about expected future firm performance to the market and whether the market responds to these disclosures. We use established, textual-analysis software to measure optimistic and pessimistic tone for approximately 23,400 earnings press releases issued between 1998 and 2003. We find a significant positive (negative) association between levels of optimistic (pessimistic) tone in earnings press releases and future ROA. We also observe a significant market response to managers' tone in earnings press releases in a short window around the earnings announcement date. Results are robust to including in the models quantitative earnings press release disclosures, including the earnings surprise, other performance indicators, and factors likely associated with future firm performance and the market response to the earnings announcement. Supplemental analyses demonstrate that results are unlikely attributable to the omission from our models of other value-relevant disclosures made concurrently with the announcement of earnings. Overall, results suggest that managers use optimistic and pessimistic tone in earnings press releases to provide investors with information about expected future firm performance and that the market responds to these disclosures.

disclosure, earnings press release, language, optimism, pessimism

Abstract:
Prior research demonstrates that forecast optimism is, in part, a consequence of analysts' cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers' plans could fail) reduces scenario-induced optimism. We find that when compared to analysts not asked to generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results demonstrate the usefulness of a cognitive, theory-based mechanism for reducing forecast optimism and suggest a boundary condition for the use of that mechanism.

counter-explanation, availability, EPS, forecast optimism

Abstract:
Prior research demonstrates that forecast optimism is, in part, a consequence of analysts' cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers' plans could fail) reduces scenario-induced optimism. We find that when compared to analysts not asked to generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results demonstrate the usefulness of a cognitive, theory-based mechanism for reducing forecast optimism and suggest a boundary condition for the use of that mechanism.

Counter-explanation, availability, EPS, forecast optimism

Abstract:
Prior research demonstrates that the sign and magnitude of analysts' earnings forecast revisions are positively associated with the sign and magnitude of prior security returns. In an experiment, we examine whether observed stock price changes influence analysts' earnings forecast revisions in the context of varying levels of uncertainty about future earnings. We find that analysts' earnings forecast revisions are influenced by observed stock price changes when uncertainty about future earnings is high, but not when uncertainty about future earnings is low. Additional analyses provide evidence that the effect of uncertainty about future earnings on analysts' earnings forecast revisions is mediated by analysts' confidence in their forecasts. Results suggest that part of the association between analysts' earnings forecast revisions and prior security returns is likely due to analysts observing stock price changes and incorporating price information, either intentionally or unintentionally, into their forecasts.

analysts' earnings forecasts, confidence, forecast revisions, stock prices

Abstract:
Avoiding continued investment in poorly performing projects is an important function of management control systems. However, prior research suggests that managers fail to use accounting information indicating that a project is performing poorly to discontinue it; that is, they escalate commitment to the project. We perform two experiments to investigate the efficacy of a potential control mechanism, third-party consultation, in preventing managerial escalation of commitment. We hypothesize that the information-processing objective (i.e., purpose) assigned to consultants influences the mental representations they construct to process and store information, which ultimately influences their recommendations regarding the continuation of a poorly performing project. Results suggest that consultants will not construct mental representations amenable to making high-quality project-continuation recommendations unless they are assigned that specific purpose. Results further suggest that applying additional effort likely will not overcome the adverse effects of having inappropriate mental representations when making project-continuation recommendations. An implication of our study is that third-party consultants likely will not prevent managerial escalation of commitment unless consultants have a specific mandate of making a project-continuation recommendation in mind when they encounter relevant accounting information.

Escalation of commitment; Mental representations; Justification; Accountability

Abstract:
Avoiding continued investment in poorly performing projects is an important function of management control systems. However, prior research suggests that managers fail to use accounting information indicating that a project is performing poorly to discontinue it; that is, they escalate commitment to the project. We perform two experiments to investigate the efficacy of a potential control mechanism, third-party consultation, in preventing managerial escalation of commitment. We hypothesize that the information-processing objective (i.e., purpose) assigned to consultants influences the mental representations they construct to process and store information, which ultimately influences their recommendations regarding the continuation of a poorly performing project. Results suggest that consultants will not construct mental representations amenable to making high-quality project-continuation recommendations unless they are assigned that specific purpose. Results further suggest that applying additional effort likely will not overcome the adverse effects of having inappropriate mental representations when making project-continuation recommendations. An implication of our study is that third-party consultants likely will not prevent managerial escalation of commitment unless consultants have a specific mandate of making a project-continuation recommendation in mind when they encounter relevant accounting information.

escalation of commitment, mental representations, justification, accountability

Abstract:
Restatements are economically significant events that damage investor trust in a firm’s financial reporting. We conduct an experiment to investigate how using online video to announce a restatement interacts with the level of responsibility a manager assumes for the restatement to influence investors’ perceptions of management’s trustworthiness and post-restatement investment decisions. We examine the use of online video for restatement disclosure due to video’s recent, explosive growth as a corporate communication tool. Our results reveal that when the CEO’s firm is the only firm restating, participants viewing the restatement announcement online via video make larger investments in the firm and are more confident in the firm’s future ability to meet analysts’ expectations than are participants who view the restatement announcement online via text. However, we do not observe this effect when the CEO’s firm and its industry peers are restating. Our results also reveal that participants’ perceptions of management’s trustworthiness mediate the influences of disclosure venue and assumed responsibility on post-restatement investment decisions. These findings are important given the dramatic increase in the number of restatements over time, the resultant deterioration of investor trust, and the Security and Exchange Commission’s recent emphasis on transitioning from traditional, paper-based to new, Internet-based disclosure venues.

trust, investor, investment decision, responsibility, disclosure venue, online video

Abstract:
Archival studies report that analysts' annual earnings forecasts are optimistic, particularly for firms reporting recent losses. This study addresses whether forecast optimism is an unintentional consequence of analysts' reactions to the structure of information about managers' future plans. I investigate whether analysts who are forecasting earnings use processes consistent with scenario thinking: envisioning a sequence of events in which proposed actions lead to future outcomes. I study professional sell-side analysts in a 2 x 2 between-subjects experiment with the structure of information (scenario versus list) and the sign of prior earnings (loss versus profit) as independent variables. I find that analysts make more optimistic two-year-ahead earnings forecasts when provided information about a manager's future plans framed as scenarios than when provided the same information framed as lists. I also find that scenario-induced optimism is greater for a firm with prior losses than for a firm with prior profits. The results are consistent with scenario thinking causing analysts to issue optimistic forecasts.

scenario thinking, analysts' forecasts, forecast optimism