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Does Accounting Conservatism Discipline Qualitative Disclosure? Evidence From Tone Management in the MD&A

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  • Carlo D'Augusta
  • Matthew D. DeAngelis

Abstract

We investigate whether accounting conservatism, which has been found to be effective in constraining management opportunism in other settings, constrains upward tone management (UTM) in the Management's Discussion and Analysis (MD&A) portion of the 10‐K filing. We hypothesize that conservatism makes it harder for managers to opportunistically downplay bad news and magnify good news when discussing current performance. Consistent with this hypothesis, we find that UTM is negatively associated with several accounting conservatism proxies. Additionally, we hypothesize and find that this association is stronger for firms where managers have higher incentives to manipulate tone. In supplemental analyses, we find evidence to suggest that our results are not due to an endogenous relationship between conservatism and UTM. We also find that conservatism neither encourages downward tone management (DTM) nor constrains managers from conveying real information about future good news. Together, our results suggest that accounting conservatism improves disclosure narratives. La prudence comptable régit‐elle l'information qualitative? Données relatives à la gestion du ton adopté dans le rapport de gestion Les auteurs se demandent si la prudence comptable, dont l'efficacité a fait ses preuves dans d'autres contextes pour ce qui est de contenir l'opportunisme de la direction, freine la propension à positiver le ton (upward tone management — UTM) dans le rapport de gestion. Ils posent l'hypothèse selon laquelle la prudence fait en sorte qu'il est plus difficile pour les gestionnaires d'édulcorer les nouvelles lorsqu'elles sont mauvaises et de les magnifier lorsqu'elles sont bonnes par opportunisme dans l'analyse de la performance actuelle de l'entreprise. Conformément à cette hypothèse, les auteurs constatent l'existence d'un lien négatif entre l'UTM et plusieurs indicateurs de prudence comptable. De plus, ils formulent et confirment l'hypothèse selon laquelle ce lien est plus fort dans le cas des entreprises dont les gestionnaires sont davantage encouragés à manipuler le ton de leurs interventions. Des analyses complémentaires semblent indiquer que ces résultats ne sont pas attribuables à une relation endogène entre la prudence et l'UTM. Les auteurs observent également que la prudence n'a pour effet ni d'augmenter la propension à édulcorer le ton (downward tone management — DTM), ni d'empêcher les gestionnaires de communiquer de l'information réelle au sujet des bonnes nouvelles à venir. Dans leur ensemble, les résultats de l'étude laissent croire que la prudence comptable améliore le compte rendu descriptif de l'information.

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  • Carlo D'Augusta & Matthew D. DeAngelis, 2020. "Does Accounting Conservatism Discipline Qualitative Disclosure? Evidence From Tone Management in the MD&A," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2287-2318, December.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:4:p:2287-2318
    DOI: 10.1111/1911-3846.12598
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    6. Zhang, Shengpeng & Li, Yaokuang & Liang, Ruixin & He, Yu, 2024. "Does management tone matter in information disclosure? Evidence from IPO online roadshows in the SSE STAR market," International Review of Financial Analysis, Elsevier, vol. 94(C).
    7. Sri Ningsih & Iman Harymawan & Nurul Fitriani & Brian Lam, 2021. "Pessimistic Tone in Earnings Announcement and CSR Disclosure: Exploring the Interacting Role of CEO Busyness," Sustainability, MDPI, vol. 13(24), pages 1-19, December.
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    11. Wang, Chunlan & Xin, Jianxuan & Sun, Fangfang & Shi, Yan & Du, Yuxuan, 2024. "The effects of manager sentiment in financial disclosure: Perspectives of operational efficiency and market reaction," Finance Research Letters, Elsevier, vol. 64(C).

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