Manipulating the Narrative: Managerial Discretion in the Use of Plain English in Earnings Announcements

82 Pages Posted: 19 Dec 2019 Last revised: 22 Mar 2021

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: March 22, 2021

Abstract

The SEC published A Plain English Handbook (PEH) with suggestions for making disclosures easier to process. We construct measures of GAAP metric (earnings and revenue) emphasis and readability in earnings announcements (EAs) that reflect the suggestions in the PEH. Using these measures, we find that managers make more favorable and more informative metrics easier to process (i.e., more prominent and readable), but that metric favorability plays a larger role than metric informativeness in explaining disclosure choices, suggesting managerial opportunism. Next, we test whether these relations differ for firms that disclose non-GAAP (NG) earnings versus firms that do not disclose NG earnings. We find that the relations between GAAP earnings favorability/informativeness and GAAP earnings Plain English measures weaken for NG disclosers. The weakened relations suggest that strategic use of Plain English in the discussion of GAAP metrics may substitute for NG earnings disclosures, which are subject to relatively greater regulatory scrutiny. Collectively, our evidence suggests that managers use the PEH tactics intended to clarify value-relevant information to clarify favorable information.

Keywords: Earnings announcement; Plain English; GAAP metrics; Favorability; Prominence; Emphasis; Market reaction; Textual analysis; Opportunistic disclosure

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 Use of Plain English in Earnings Announcements (March 22, 2021). 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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