Damage Control: Changes in Disclosure Tone after Financial Misconduct

58 Pages Posted: 27 Jul 2018  

Rebecca Files

University of Texas at Dallas

Alex Holcomb

University of Texas at El Paso - College of Business Administration; University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Gerald S. Martin

American University - Kogod School of Business

Paul Mason

Baylor University

Date Written: July 6, 2018

Abstract

This paper examines whether managers attempt to mitigate the negative outcomes of financial misconduct by altering the tone of required disclosures. Using a series of difference-in-differences analyses, we show that following fraudulent activity, managers use more negative and litigious words in disclosures, as compared to a matched sample of control firms. We find managers that have a larger set of negative outcomes, such as those with foreknowledge of the fraud committed, are more aggressive in altering disclosure when compared to peer firms. Our results also suggest that negative outcomes due to financial misconduct, such as monetary fines and reputation loss, are mitigated by altering the tone in financial disclosures. Altogether, we conclude that managers alter disclosures to reduce the set of negative outcomes they face following securities law violations.

Keywords: Disclosure, Tone, Securities and Exchange Commission, Fraud, Reputation

JEL Classification: G38, K22, M41, M48

Suggested Citation

Files, Rebecca and Holcomb, Alex and Martin, Gerald S. and Mason, Paul, Damage Control: Changes in Disclosure Tone after Financial Misconduct (July 6, 2018). Available at SSRN: https://ssrn.com/abstract=3209501 or http://dx.doi.org/10.2139/ssrn.3209501

Rebecca Files (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Alex Holcomb

University of Texas at El Paso - College of Business Administration ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Paul Mason

Baylor University ( email )

Waco, TX 76798
United States

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