The way managers structure their narratives when disclosing news about an organization’s performance affects how analysts perceive that news—and how the market reacts to it.
Matthew D. DeAngelis of Georgia State University and I studied how “tone dispersion,” or the degree to which positive or negative language is spread evenly throughout a narrative, affects analyst and investor perceptions of earnings conference calls. We found that managers tend to disperse positive tone words more than negative tone words, suggesting a higher emphasis on good versus bad news. We also found evidence that tone structure is informative, in that it helps to predict future performance, as well as at least partially strategic. For instance, we found higher negative tone dispersion when firms perform especially well or poorly, suggesting that managers disperse tone in order to manage high expectations downward or take a linguistic “big bath” when overall news is bad.
Our study enhances our understanding of how managers use narratives to communicate information and how users of financial information respond to those narratives. While the underlying news, such as missing an earnings target, is the most important factor in users’ reactions, our study suggests that the placement of that news within a narrative framework affects those reactions as well.
In other words, it matters not only what managers say, but how they say it.
Read more about this topic in our article, “The Structure of Voluntary Disclosure Narratives: Evidence from Tone Dispersion,” in the Journal of Accounting Research.