Express Yourself: Why Managers’ Disclosure Tone Varies Across Time and What Investors Learn from It

49 Pages Posted: 13 Jan 2017 Last revised: 30 Aug 2019

See all articles by John L. Campbell

John L. Campbell

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

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Hsin-min Lu

National Taiwan University

Logan B. Steele

Oregon State University

Multiple version iconThere are 2 versions of this paper

Date Written: July 13, 2019

Abstract

We argue that volatility in a manager’s disclosure tone across time should be a function of two components: (1) the firm’s innate operating risk, and (2) the extent to which the manager’s disclosure transparently reflects that risk. Consistent with this argument, we find that both operating risk and disclosure transparency are important determinants of disclosure tone volatility. We then examine whether investors incorporate the incremental information provided by disclosure tone volatility into their assessments of firm risk. If disclosure tone volatility primarily provides investors with incremental information about a firm’s operating risk, we should find a positive association between tone volatility and market-based assessments of risk. On the other hand, if disclosure tone volatility primarily provides investors with incremental information about a manager’s disclosure transparency, we should find a negative association between tone volatility and market-based assessments of risk. Consistent with an operating risk explanation, we find a positive association between disclosure tone volatility and market-based assessments of firm risk after controlling for a comprehensive set of proxies for operating risk and transparency. We find little support for an information risk explanation, even when we examine multiple measures specifically designed to capture information risk. Taken together, our results suggest that although disclosure tone volatility is a function of both a firm’s operating risk and a manager’s disclosure transparency, investors appear to respond as if disclosure tone volatility only provides incremental information about a firm’s operating risk.

Keywords: Disclosure tone; tone variability; firm risk; cost of capital; textual analysis; voluntary disclosure

Suggested Citation

Campbell, John L. and Lee, Hye Seung (Grace) and Lu, Hsin-min and Steele, Logan B., Express Yourself: Why Managers’ Disclosure Tone Varies Across Time and What Investors Learn from It (July 13, 2019). Gabelli School of Business, Fordham University Research Paper No. 2897504; Gabelli School of Business, Fordham University Research Paper No. 2897504. Available at SSRN: https://ssrn.com/abstract=2897504 or http://dx.doi.org/10.2139/ssrn.2897504

John L. Campbell (Contact Author)

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

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Hsin-min Lu

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Logan B. Steele

Oregon State University ( email )

Corvallis, OR 97330
United States

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