Does managerial ability affect disclosure? Evidence from earnings press releases

Yan, B; Arslan-Ayaydin, Ö; Thewissen, J; Torsin, W

Does managerial ability affect disclosure? Evidence from earnings press releases

Yan, B Arslan-Ayaydin, Ö Thewissen, J Torsin, W

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Publisher:: Emerald
Publication Type:: Journal Article
Citation:: Asian Review of Accounting, 2021, 29, (2), pp. 192-226
Issue Date:: 2021-02-18

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Field	Value	Language
dc.contributor.author	Yan, B
dc.contributor.author	Arslan-Ayaydin, Ö
dc.contributor.author	Thewissen, J
dc.contributor.author	Torsin, W
dc.date.accessioned	2022-07-03T07:52:56Z
dc.date.available	2022-07-03T07:52:56Z
dc.date.issued	2021-02-18
dc.identifier.citation	Asian Review of Accounting, 2021, 29, (2), pp. 192-226
dc.identifier.issn	1321-7348
dc.identifier.uri	http://hdl.handle.net/10453/158559
dc.description.abstract	<jats:sec><jats:title content-type="abstract-subheading">Purpose</jats:title><jats:p>Prior research shows that managers with lower ability release less accurate management earnings forecasts and have more earnings restatements, lower earnings persistence and lower quality accruals estimations. Yet, whether the impact of managerial ability (MA) on financial reporting can be extended to the narrative section of firms' financial disclosures needs to be theoretically and empirically examined. The authors theorize in this paper that managers with low ability opportunistically inflate the tone to increase outsiders' perceptions of their ability. The authors also examine the relation between MA and the informativeness of tone to predict future firm performance and explain investors' reaction at earnings announcement.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title><jats:p>The authors collect 24,000 earnings press releases of 1,149 distinct firms between 2004 and 2013. Content analysis is used to proxy the tone of the disclosures. The authors use the score developed by Demerjian <jats:italic>et al.</jats:italic> (2012) to measure MA. The authors then employ panel data regressions to examine the impact of MA on disclosure tone.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Findings</jats:title><jats:p>The authors find that low-ability managers inflate the disclosure tone to positively influence labor market's perceptions about their ability. This effect is magnified for younger and shorter-tenured managers, for firms with more intense monitoring and during bear markets. The authors also find that the tone of earnings press releases of low-ability managers results in a lower stock price reaction. Supplementary analyses show that the results do not only hold for the tone, but also can be extended to other linguistic features such as the numerical intensity and the readability of earnings press releases. The results are robust to alternative library specifications and other corporate disclosures such as CEO letters to shareholders or 10-K filings.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Research limitations/implications</jats:title><jats:p>The paper shows that managers worry about how firm performance influences the labor market assessment of their ability. In particular, the authors find that managers of low ability are willing to opportunistically manipulate the content of corporate disclosures to improve this perception and build their reputation.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Originality/value</jats:title><jats:p>The authors contribute by providing theoretical and empirical evidence on how managers attempt to steer assessments of their ability by manipulating corporate disclosures. Consistent with prior business research suggesting that one's ability is a key feature that affects managers' propensity to engage in ethical practices, such as tax avoidance or manipulation of financial information, this study shows that less able managers tend to inflate the tone of the earnings announcements and that this ability-driven bias is likely to be magnified by career concerns.</jats:p></jats:sec>
dc.language	en
dc.publisher	Emerald
dc.relation.ispartof	Asian Review of Accounting
dc.relation.isbasedon	10.1108/ara-03-2020-0036
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	1501 Accounting, Auditing and Accountability
dc.title	Does managerial ability affect disclosure? Evidence from earnings press releases
dc.type	Journal Article
utslib.citation.volume	29
utslib.for	1501 Accounting, Auditing and Accountability
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/DVC (International)
utslib.copyright.status	closed_access	*
dc.date.updated	2022-07-03T07:52:55Z
pubs.issue	2
pubs.publication-status	Published
pubs.volume	29
utslib.citation.issue	2

Abstract:

PurposePrior research shows that managers with lower ability release less accurate management earnings forecasts and have more earnings restatements, lower earnings persistence and lower quality accruals estimations. Yet, whether the impact of managerial ability (MA) on financial reporting can be extended to the narrative section of firms' financial disclosures needs to be theoretically and empirically examined. The authors theorize in this paper that managers with low ability opportunistically inflate the tone to increase outsiders' perceptions of their ability. The authors also examine the relation between MA and the informativeness of tone to predict future firm performance and explain investors' reaction at earnings announcement.Design/methodology/approachThe authors collect 24,000 earnings press releases of 1,149 distinct firms between 2004 and 2013. Content analysis is used to proxy the tone of the disclosures. The authors use the score developed by Demerjian et al. (2012) to measure MA. The authors then employ panel data regressions to examine the impact of MA on disclosure tone.FindingsThe authors find that low-ability managers inflate the disclosure tone to positively influence labor market's perceptions about their ability. This effect is magnified for younger and shorter-tenured managers, for firms with more intense monitoring and during bear markets. The authors also find that the tone of earnings press releases of low-ability managers results in a lower stock price reaction. Supplementary analyses show that the results do not only hold for the tone, but also can be extended to other linguistic features such as the numerical intensity and the readability of earnings press releases. The results are robust to alternative library specifications and other corporate disclosures such as CEO letters to shareholders or 10-K filings.Research limitations/implicationsThe paper shows that managers worry about how firm performance influences the labor market assessment of their ability. In particular, the authors find that managers of low ability are willing to opportunistically manipulate the content of corporate disclosures to improve this perception and build their reputation.Originality/valueThe authors contribute by providing theoretical and empirical evidence on how managers attempt to steer assessments of their ability by manipulating corporate disclosures. Consistent with prior business research suggesting that one's ability is a key feature that affects managers' propensity to engage in ethical practices, such as tax avoidance or manipulation of financial information, this study shows that less able managers tend to inflate the tone of the earnings announcements and that this ability-driven bias is likely to be magnified by career concerns.

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http://hdl.handle.net/10453/158559