California State University, Long Beach
Siew Hong Teoh
University of California - Paul Merage School of Business
Chinese University of Hong Kong (CUHK) - School of Accountancy
November 16, 2011
We investigate whether firms manage the tone of the words in earnings press releases and how investors react to tone management. We estimate abnormal positive tone (ABTONE) after controlling for firm characteristics related to fundamentals such as earnings, risk, and complexity. We find that ABTONE contains negative information about future firm fundamentals one to three-years ahead. ABTONE is associated with a higher incidence of meeting/beating earnings thresholds (past earnings levels, zero earnings, and analysts’ consensus forecasts), and future earnings restatements, SEO or M&A, but a lower incidence of stock option grants. Finally, ABTONE is positively related to the immediate stock price reaction to earnings announcements and negatively to the one and two-quarter delayed reaction. All of the results are incremental to abnormal accruals. Overall, the evidence is consistent with strategic tone management that disinforms investors about firm future fundamentals.
Number of Pages in PDF File: 47
Keywords: tone management, qualitative disclosure, earnings management, market efficiency, behavioral finance
JEL Classification: M41, G02working papers series
Date posted: November 17, 2011 ; Last revised: November 21, 2011
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