Manipulating the Narrative: Managerial Discretion in the Emphasis of GAAP Metrics in Earnings Announcement Press Releases

65 Pages Posted: 19 Dec 2019

See all articles by Jeremiah W. Bentley

Jeremiah W. Bentley

Isenberg School of Management, University of Massachusetts Amherst

Kyle Stubbs

University of Massachusetts Amherst

Yushi Tian

University of Massachusetts Amherst

Robert Lowell Whited

North Carolina State University

Date Written: December 3, 2019

Abstract

We analyze management’s emphasis (i.e., prominence, frequency, and textual highlighting) of GAAP metrics within the narrative portion of earnings announcement press releases; we assess whether management uses emphasis opportunistically, informatively, or both. We find that management emphasizes informative (i.e. persistent and value-relevant) metrics, but only when the metrics portray favorable performance, indicating that managers are selectively informative. In contrast, managers appear broadly opportunistic, in that they emphasize favorable metrics regardless of metric informativeness. Despite these efforts, analysis of subsequent stock returns reveals no evidence that managerial opportunism successfully misleads investors. These results provide important insights into managerial discretion over a largely unregulated aspect of disclosure. Overall, our results indicate nuances in management’s discretionary emphasis choices that extend beyond earnings management and non-GAAP reporting to the nature of the discussion of GAAP metrics in the narrative portion of earnings announcements. Our results also demonstrate managerial bias in the implementation of the SEC’s Plain English guidelines.

Keywords: Earnings announcement, GAAP metrics, Favorability, Prominence, Emphasis, Market reaction, Textual analysis

JEL Classification: D82, D83, G14, M40, M41, M45

Suggested Citation

Bentley, Jeremiah W. and Stubbs, Kyle and Tian, Yushi and Whited, Robert Lowell, Manipulating the Narrative: Managerial Discretion in the Emphasis of GAAP Metrics in Earnings Announcement Press Releases (December 3, 2019). Available at SSRN: https://ssrn.com/abstract=3497739 or http://dx.doi.org/10.2139/ssrn.3497739

Jeremiah W. Bentley

Isenberg School of Management, University of Massachusetts Amherst ( email )

Department of Accounting
Amherst, MA 01003
United States

Kyle Stubbs

University of Massachusetts Amherst ( email )

Amherst, MA 01003-4910
United States

Yushi Tian

University of Massachusetts Amherst ( email )

Amherst, MA 01003-4910
United States

Robert Lowell Whited (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695
United States

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