Narrative Conservatism

Abstract

We define narrative conservatism as narratives reflecting bad news in a timelier, more news-consistent, and more complete manner than good news. Using a sample of Form 8-K filings from 1993 to 2020, we find that narrative disclosure is conservative. 8-Ks are filed faster, their tone is more news-consistent, and they contain more filings, items, exhibits, and graphs in response to bad news than to good news. We document higher narrative conservatism in voluntary 8-Ks and in settings where managers have more incentives to disclose bad news. In addition, we find narrative conservatism in quarterly reports as well, especially within the MD&A section and higher narrative conservatism for firms with low conditional conservatism.

Keywords: Narrative Disclosure, Narrative Conservatism, Conservatism, Timeliness, Tone, Completeness, Textual Analysis

JEL Classification: M41