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Managers set the tone: Equity incentives and the tone of earnings press releases

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  • Arslan-Ayaydin, Özgür
  • Boudt, Kris
  • Thewissen, James

Abstract

Earnings press releases, as a timely vehicle for communicating a firm’s performance to third parties, can be used by managers to influence the perception of the firm’s achievements. Taking the stock price reaction to the tone of earnings press releases at earnings announcements into account, we argue that equity-based incentives induce managers to inflate the tone. We further posit that the impact of tone on the abnormal stock returns at the earnings announcements depends on the magnitude of the equity-based incentives. Based on over 26,000 earnings press releases of S&P1500 firms between 2004Q4 and 2012Q4, we find that the tone of earnings press releases tends to be more positive when the managerial portfolio value is more closely tied to the firm’s stock price. We also find that investors react proportionally less to the tone as managers’ equity incentives increase.

Suggested Citation

  • Arslan-Ayaydin, Özgür & Boudt, Kris & Thewissen, James, 2016. "Managers set the tone: Equity incentives and the tone of earnings press releases," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 132-147.
    • Handle: RePEc:eee:jbfina:v:72:y:2016:i:s:p:s132-s147
    DOI: 10.1016/j.jbankfin.2015.10.007
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    More about this item

    Keywords

    Equity incentives; Market efficiency; Textual tone; Voluntary disclosure;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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