The Strategic use of Language in Corrupt Firms’ Financial Disclosures

48 Pages Posted: 28 Oct 2014 Last revised: 19 Dec 2014

See all articles by Kerstin Lopatta

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Reemda Jaeschke

University of Oldenburg - Accounting and Corporate Governance

Cheong Yi

City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: December 20, 2014

Abstract

This paper explores the role of language (tone and readability) in financial disclosures in detecting a firm’s likelihood of violating the FCPA. Matching FCPA violators with a control sample of non-violators, we examine whether the tone and readability of management’s 10-K filings can be linked to the likelihood of getting involved in an FCPA violation. We find that the management of FCPA violators uses more negative, uncertain, litigious, and complex language when disclosing financials compared to non-violators. Furthermore, we find that managers make strategic use of language after FCPA prosecution. Although they face additional litigation risk from FCPA prosecution, they lower their negative, uncertain, and litigious tone in 10-K filings. This effect is particularly strong for firms with low readability in SEC filings and low board independence.

Keywords: FCPA, corruption, text analysis, language, tone, readability, financial disclosures

JEL Classification: M41, D73, K42

Suggested Citation

Lopatta, Kerstin and Jaeschke, Reemda and Yi, Cheong, The Strategic use of Language in Corrupt Firms’ Financial Disclosures (December 20, 2014). Available at SSRN: https://ssrn.com/abstract=2512323 or http://dx.doi.org/10.2139/ssrn.2512323

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Reemda Jaeschke (Contact Author)

University of Oldenburg - Accounting and Corporate Governance ( email )

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

Cheong Yi

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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