Managers Set the Tone: Equity Incentives and the Tone of Earnings Press Releases

41 Pages Posted: 16 Feb 2014 Last revised: 21 Nov 2017

See all articles by Özgür Arslan-Ayaydin

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

James Thewissen

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: August 15, 2015

Abstract

Earnings press releases, as a timely vehicle for communicating a firm's performance to third parties, can be used by managers to influence the perception of the firm's achievements. Taking the stock price reaction to the tone of earnings press releases at earnings announcements into account, we argue that equity-based incentives induce managers to inflate the tone. We further posit that the impact of tone on the abnormal stock returns at the earnings announcements depends on the magnitude of the equity-based incentives. Based on over 26,000 earnings press releases of S&P1500 firms between 2004Q4 and 2012Q4, we find that the tone of earnings press releases tends to be more positive when the managerial portfolio value is more closely tied to the firm's stock price. We also find that investors react proportionally less to the tone as managers' equity incentives increase.

Keywords: Equity incentives, Market efficiency, Textual tone, Voluntary disclosure

JEL Classification: G14, G17, M40

Suggested Citation

Arslan-Ayaydin, Özgür and Boudt, Kris and Thewissen, James, Managers Set the Tone: Equity Incentives and the Tone of Earnings Press Releases (August 15, 2015). Journal of Banking and Finance, 72, S132-S147, 2015. Available at SSRN: https://ssrn.com/abstract=2396816 or http://dx.doi.org/10.2139/ssrn.2396816

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

James Thewissen (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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