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Textual tone in corporate financial disclosures: a survey of the literature

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Abstract

This study reviews the research on the usefulness, determinants, and measurements of the textual tone of corporate financial disclosures. This review suggests that various stakeholders (e.g., investors, analysts, and auditors) use the tone of corporate financial disclosure to infer management’s private information on the company’s prospects, risks, firm value, and operational outcomes. The tone of corporate financial disclosure is jointly determined by a number of factors, including corporate operational characteristics (e.g., financial performance, size, growth, volatility), management opportunism (e.g., stock-based compensation, seasoned equity issuance, merger and acquisition, etc.), and management characteristics (e.g., optimistic tendency, CEO narcissism, CEO/CFO age, etc.). This study also summarizes the four major methods for measuring tone using textual analysis technologies. This study is the first review of the growing body of research on the determinants of the tone of corporate financial disclosure and the usefulness and measurement of such tone. It will be very useful to researchers, directors and officers, investors, and regulators around the world.

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Notes

  1. See Henry (2008), Demers and Vega (2010), Feldman et al. (2010), Loughran and McDonald (2011), Davis et al. (2012), Doran et al. (2012), Price et al. (2012), Demers and Vega (2014), Huang et al. (2014), Blau et al. (2015), etc.

  2. For example, the National Investor Relations Institute and the Financial Executives Institute also recommend that managers present in earnings press releases a reasonably balanced perspective of operating performance. Additionally, New York Stock Exchange rules require that press releases place news in the proper perspective and that managers avoid “overly optimistic forecasts, exaggerated claims and unwarranted promises” (NYSE manual).

  3. Narcissism is a psychological construct consisting of personality traits such as a grandiose sense of self-importance and uniqueness, a preoccupation with fantasies of unlimited success or power, and a demand for excessive admiration (Emmons 1987; Brown et al. 2009).

  4. As of May 14, 2019, the list contains 1915 positive words and 2291 negative words. See the GI website http://www.wjh.harvard.edu/~inquirer/homecat.htm for more information.

  5. Source: http://3we057434eye2lrosr3dcshy.wpengine.netdna-cdn.com/wp-content/uploads/2015/06/WRDS-SEC-Analytics-Suite.pdf.

  6. For example, Arslan-Ayaydin et al. (2016), Blau et al. (2015), Buchholz et al. (2018), Davis et al. (2015), Davis and Tama-Sweet (2012), DeBoskey et al. (2019), Feldman et al. (2010), Garcia (2013), Huang et al. (2014), Jegadeesh and Wu (2013), Liu and McConnell (2013), Loughran and McDonald (2014), Luo and Zhou (2017), Marquez-Illescas et al. (2019), Rogers et al. (2011), and Twedt and Rees (2012).

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Authors and Affiliations

  1. Charles W. Lamden School of Accountancy, San Diego State University, 5500 Campanile Drive, SSE 2411, San Diego, CA, 92182-8234, USA

    Yan Luo

  2. California State University San Marcos, San Marcos, USA

    Linying Zhou

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  1. Yan Luo
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Correspondence to Yan Luo.

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Luo, Y., Zhou, L. Textual tone in corporate financial disclosures: a survey of the literature. Int J Discl Gov 17, 101–110 (2020). https://doi.org/10.1057/s41310-020-00077-y

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