Board Characteristics and Negative Disclosure Tone

Abstract

We examine the role of corporate boards of directors in shaping disclosure tone in 10-K filings. Boards of directors play an important governance role with respect to mandatory disclosures and personally sign off on Form 10-K, leading us to expect directors to influence financial reporting narratives. We investigate whether the negative tone of firms’ narrative annual report disclosures is associated with the human and social capital of its board of directors. We find evidence that directors’ male gender uniformity, education, financial expertise, and board turnover are associated with more negative disclosure tone, while directors’ age is associated with less negative disclosure tone. A host of alternative specifications lends confidence to our inferences. Our study helps decode the “black box” of annual report disclosure tone, which Loughran and McDonald (2011) show has important economic implications.

Keywords: Board of directors, annual report, 10-K, tone, narrative disclosure