Abnormal tone in management earnings forecast, media negative coverage, and insider trading

Based on previous studies, we define the term abnormal language tone, used in management earnings forecasts, as the extent to which the language tone in the forecast deviates from the regular language tone that is used to describe business performance. We posit that the use of abnormal language tone is associated with insider trading. We specifically analyze a sample of Chinese listed firms during the period of 2010–2017. Our results indicate that, when managers intend to sell their shares, they release information in an abnormally optimistic tone. When they intend to buy shares, they release information in an abnormally pessimistic tone in order to bring down the stock price. However, we found that the media can exert supervision and corporate governance control on listed firms. If the media reports negative news prior to the earnings forecast, the relationship between abnormal language tone and insider trading will be weaker. Our findings complement prior studies in two ways. First, we provide evidence that the managers manipulate the tone of the language in earnings forecasts to facilitate insider trading. Second, we show that the media not only exposes the immoral behaviors of listed firm but can also prevent future manipulation of the tone in management earnings forecasts