The Abnormal Tone of CEO Letters in ESG Reports: What Does it Tell us about Future ESG and Financial Performance?

37 Pages Posted: 27 Mar 2024

See all articles by Lars-Eric Brüske

Lars-Eric Brüske

University of Hamburg

Nicole V.S. Ratzinger-Sakel

University of Hamburg

Florian Habermann

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management

Date Written: March 1, 2024

Abstract

Given the increasing relevance for companies to report on their ESG performance, companies respond by voluntarily issuing ESG reports. These reports usually contain CEO letters, in which CEOs comment on past and future ESG performance. In our study of 1,421 CEO letters in ESG reports of U.S. listed companies from 2015-2021, we examine whether the abnormal tone used by CEOs in these CEO letters is indicative of future ESG performance, or whether it is used to disguise poor future ESG performance instead. Additionally, we analyze the association between the abnormal tone of CEO letters in ESG reports and future financial performance, since CEOs’ confidence might be driven by future financial performance and in turn spill over to CEO letters in ESG reports. Our analyses reveal that the abnormal tone used in CEO letters is negatively associated with future ESG performance, while being positively associated with future financial performance. These results suggest that CEOs use the abnormal tone to influence the stakeholders’ perceptions, e.g., by masking poor future ESG performance in ESG reports. Moreover, the abnormal tone of CEO letters in ESG reports seems to be driven by future financial performance, indicating a spill-over effect of CEOs’ confidence regarding future financial performance. Taken together, we provide evidence that the abnormal tone of CEO letters in ESG reports is utilized as a form of impression management.

Keywords: tone, abnormal tone, textual analysis, CEO letter, ESG reporting, financial reporting

JEL Classification: M40, M41, M49

Suggested Citation

Brüske, Lars-Eric and Ratzinger-Sakel, Nicole V.S. and Habermann, Florian, The Abnormal Tone of CEO Letters in ESG Reports: What Does it Tell us about Future ESG and Financial Performance? (March 1, 2024). Available at SSRN: https://ssrn.com/abstract=4744534 or http://dx.doi.org/10.2139/ssrn.4744534

Lars-Eric Brüske (Contact Author)

University of Hamburg ( email )

Hamburg

Nicole V.S. Ratzinger-Sakel

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Florian Habermann

Catholic University of Eichstaett-Ingolstadt - Ingolstadt School of Management ( email )

Auf der Schanz 49
Ingolstadt, 85049
Germany

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