Contemporaneous Verification of Language: Evidence from Management Earnings Forecasts

45 Pages Posted: 4 Mar 2011 Last revised: 22 Dec 2015

See all articles by Stephen P. Baginski

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting

Elizabeth A. Demers

University of Lausanne - Department of Accounting and Control

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy

Y. Julia Yu

University of Virginia

Date Written: November 30, 2015

Abstract

Research documents that linguistic tone is incrementally informative about stock returns. What remains a puzzle is the mechanism by which investors can assess its credibility. We examine whether contemporaneous information in management earnings forecasts serves as a timely alternative to ex post verification. We document that ex post verifiable quantitative news in unbundled forecasts, and characteristics of the linguistic tone itself, affect investors’ pricing of tone. Consistent with higher quality signals enhancing the credibility of contemporaneous lower quality signals, we find that quantitative news verifies the associated linguistic tone; when the two signals have the same sign, the price effect of tone is stronger. Furthermore, the pricing attenuation of tone is increasing in the imprecision of the quantitative forecast, suggesting that lower forecast quality compromises the quantitative signal’s credibility enhancement. Managerial incentives to inflate tone lead to the verification effect being greater for optimistic language, while management’s use of hyperbole results in attenuation of the tone’s pricing.

Keywords: Management forecasts; linguistic tone; cheap talk; management incentives; voluntary disclosure

JEL Classification: G14, D82, M41

Suggested Citation

Baginski, Stephen P. and Demers, Elizabeth A. and Wang, Chong and Yu, Yingri Julia, Contemporaneous Verification of Language: Evidence from Management Earnings Forecasts (November 30, 2015). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1773429 or http://dx.doi.org/10.2139/ssrn.1773429

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Elizabeth A. Demers (Contact Author)

University of Lausanne - Department of Accounting and Control ( email )

UNIL-Dorigny
Anthropole
Lausanne, 1015
Switzerland

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy ( email )

555 Dyer Road
Monterey, CA 93943
United States

Yingri Julia Yu

University of Virginia ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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