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Management's performance justification and failure to meet earnings thresholds

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  • Shuyu Zhang
  • Walter Aerts

Abstract

We examine the intensity of management's performance justification as a remedial narrative impression management device, by investigating the association between behavioural earnings thresholds and causal language intensity on earnings-related outcomes in annual management commentary reports. Not meeting key earnings thresholds, such as positive earnings, positive earnings change and analyst earnings consensus, is argued to be a significant accountability predicament to which firms tend to respond with more intense use of causal language on performance in order to mitigate expected negative consequences of these events. Our results document a significant positive association between failure to meet earnings thresholds and causal language intensity. Moreover, we find that failure firms (not meeting earnings thresholds) tend to use more causal language in a weaker information environment. In addition, we document that firms that miss key earnings thresholds and use more causal language experience a less volatile abnormal stock return after the 10-K filing release. This study contributes to the impression management literature by evidencing incentives for the remedial use of causal language in management commentary.

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  • Shuyu Zhang & Walter Aerts, 2015. "Management's performance justification and failure to meet earnings thresholds," Accounting and Business Research, Taylor & Francis Journals, vol. 45(6-7), pages 841-868, December.
    • Handle: RePEc:taf:acctbr:v:45:y:2015:i:6-7:p:841-868
    DOI: 10.1080/00014788.2015.1048771
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    Cited by:

    1. Mohammad Abedalrahman Alhmood & Hasnah Shaari & Redhwan Al-dhamari, 2020. "CEO Characteristics and Real Earnings Management in Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 255-266, July.
    2. Shuyu Zhang & Walter Aerts & Dunli Zhang & Zishan Chen, 2022. "Positive tone and initial coin offering," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2237-2266, June.
    3. Iatridis, George Emmanuel & Pappas, Kostas & Walker, Martin, 2022. "Narrative disclosure quality and the timeliness of goodwill impairments," The British Accounting Review, Elsevier, vol. 54(2).
    4. Berkin, Anil & Aerts, Walter & Van Caneghem, Tom, 2023. "Feasibility analysis of machine learning for performance-related attributional statements," International Journal of Accounting Information Systems, Elsevier, vol. 48(C).

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