The Impact of Credibility on the Pricing of Managerial Textual Content

Abstract

The conditions under which managerial textual content that has the potential to be “cheap talk” is more influential in the price formation process have not been previously investigated. We document that investors respond more to unexpected managerial net optimism in settings where our numerous proxies for credible communications are more strongly present. The market impact of this soft information is also higher when the simultaneously released earnings are less informative signals about firm value. Further investigations reveal that a second dimension of managerial communication, textual uncertainty, is incrementally useful in predicting firm-specific abnormal return volatility.

Keywords: Textual analysis; textual content; cheap talk; earnings quality; earnings announcement; information uncertainty; stock price volatility; media coverage; voluntary disclosure; communication credibility

JEL Classification: G14; D82; M41