The Effects of Financial Markets on Managerial Opportunistic Behavior: Evidence from CEOs’ Tone Manipulation

Abstract

We examine the effect of financial markets on the tone manipulation of earnings press releases by CEOs. We find that CEOs with high compensation convexity are significantly more likely to employ positive tone management right after recent high industry returns. Further analysis shows that this opportunistic behavior is concentrated in firms with weak corporate governance. The positive tone management has a positive stock return effect around the earnings announcement and significantly increases subsequent idiosyncratic return volatility. CEOs benefit from the tone management by exercising stock options and selling stocks around earnings announcements. Our results suggest that managers may extract information from capital markets to learn the optimal timing to engage opportunistic behavior.

Keywords: Compensation convexity; Tone management; Financial markets; Managerial opportunistic behavior; Industry return; Feedback effect

JEL Classification: G14, G34, G38