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

57 Pages Posted: 4 Mar 2021

See all articles by Hua Cheng

Hua Cheng

Nankai University - School of Finance; University of Texas at Austin

Tingting Liu

Iowa State University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: August 1, 2020

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

Suggested Citation

Cheng, Hua and Liu, Tingting and Wei, Kuo-Chiang (John), The Effects of Financial Markets on Managerial Opportunistic Behavior: Evidence from CEOs’ Tone Manipulation (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3762252 or http://dx.doi.org/10.2139/ssrn.3762252

Hua Cheng (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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