The Dark Side of Market Feedback: Evidence on CEOs’ Tone Manipulation
67 Pages Posted: 4 Mar 2021 Last revised: 28 Nov 2023
Date Written: August 1, 2020
Abstract
Existing literature highlights how financial markets enable managers to make optimal corporate decisions through the discovery of valuable information. In this paper, we explore a potential downside of this information feedback loop by investigating whether the information derived from capital markets influences managers’ tone manipulation strategies. We focus on managers whose compensation is highly sensitive to fluctuations in stock returns, often referred to as having a high compensation convexity or vega. We find that high vega-CEOs are significantly more likely to engage in tone management following periods of high industry returns. Abnormal tone is positively related to earnings announcement returns, but negatively related to subsequent returns. Furthermore, CEOs who engage in tone manipulation exercise a greater number of stock options and increase their stock sales around earnings announcements before price reversals. Our results suggest that managers extract information from capital markets to strategically time their tone management decisions to maximize personal gains.
Keywords: Compensation convexity; Tone management; Financial markets; Managerial opportunistic behavior; Industry return; Feedback effect
JEL Classification: G14, G34, G38
Suggested Citation: Suggested Citation