The Structure of Voluntary Disclosure Narratives: Evidence from Tone Dispersion
TL;DR: The authors examine tone dispersion, or the degree to which tone words are spread evenly within a narrative, to evaluate whether narrative structure provides insight into managers' voluntary disclosures and users' responses to those disclosures.
Abstract: We examine tone dispersion, or the degree to which tone words are spread evenly within a narrative, to evaluate whether narrative structure provides insight into managers’ voluntary disclosures and users’ responses to those disclosures. We find that positive and negative tone dispersion are associated with current aggregate and disaggregated performance and future performance, managers’ financial reporting decisions and managers’ incentives and actions to manage perceptions. Furthermore, we find that tone dispersion is associated with analysts’ and investors’ responses to conference call narratives. Our results suggest that tone dispersion both reflects and affects the information that managers convey through their narratives.
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TL;DR: In this paper, the authors describe the nuances of the textual analysis and some of the tripwires in implementation and highlight the contemporary textual analysis literature and highlight areas of future research.
Abstract: Relative to quantitative methods traditionally used in accounting and finance, textual analysis is substantially less precise. Thus, understanding the art is of equal importance to understanding the science. In this survey, we describe the nuances of the method and, as users of textual analysis, some of the tripwires in implementation. We also review the contemporary textual analysis literature and highlight areas of future research.
858 citations
TL;DR: This survey describes the nuances of the method and, as users of textual analysis, some of the tripwires in implementation and reviews the contemporary textual analysis literature to highlight areas of future research.
Abstract: Relative to quantitative methods traditionally used in accounting and finance, textual analysis is substantially less precise Thus, understanding the art is of equal importance to understanding the science In this survey we describe the nuances of the method and, as users of textual analysis, some of the tripwires in implementation We also review the contemporary textual analysis literature and highlight areas of future research
567 citations
TL;DR: In this article, the authors analyze a procedure common in empirical accounting and finance research where researchers use ordinary least squares to decompose a dependent variable into its predicted and residual components and use the residuals as the dependent variable in a second regression.
Abstract: We analyze a procedure common in empirical accounting and finance research where researchers use ordinary least squares to decompose a dependent variable into its predicted and residual components and use the residuals as the dependent variable in a second regression. This two‐step procedure is used to examine determinants of constructs such as discretionary accruals, real activities management, discretionary book‐tax differences, and abnormal investment. We show that the typical implementation of this procedure generates biased coefficients and standard errors that can lead to incorrect inferences, with both Type I and Type II errors. We further show that the magnitude of the bias in coefficients and standard errors is a function of the correlations between model regressors. We illustrate the potential magnitude of the bias in accounting research in four commonly used settings. Our results indicate significant bias in many of these settings. We offer three solutions to avoid the bias.
280 citations
TL;DR: In this paper, the authors identify important themes in the disclosure literature and use this as a framework to discuss the conference papers that appear in this volume and examine how managers' disclosure practices are being affected by changes in technology, the media, and capital markets.
Abstract: Recent changes in technology and the media are causing significant changes in how capital markets assimilate and respond to information. We identify important themes in the disclosure literature and use this as a framework to discuss the conference papers that appear in this volume. These papers examine how managers’ disclosure practices are being affected by changes in technology, the media, and capital markets. While this work makes important progress, we discuss how continuing technological change and the emergence of new forms of media offer further opportunities for research on the role of disclosure in capital markets.
247 citations
TL;DR: In this article, the authors examine a selection of performance determinants to gain insights into the factors associated with conciseness, completeness and balance in IR, and find that firms with worse social performance provide reports that are foggier and with less information on their sustainability performance (i.e., less complete).
Abstract: The Integrated Reporting Framework of 2013 represents the latest international attempt to connect a firm’s financial and sustainability (i.e., environmental, social and governance) performance in one company report. An Integrated Report (IR) should communicate “concisely” about how a firm’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of sustainable value. At the same time, an IR needs to be “complete and balanced”, i.e., broadly including all material matters, both positive and negative, in a balanced way. Drawing on impression management studies, we examine a selection of performance determinants to gain insights into the factors associated with conciseness, completeness and balance in IR. The results from a sample of IR early adopters show that in the presence of a firm’s weak financial performance, the IR tends to be significantly longer and less readable (i.e., less concise), and more optimistic (i.e., less balanced). We additionally find that firms with worse social performance provide reports that are foggier (i.e., less concise) and with less information on their sustainability performance (i.e., less complete). Our evidence implies that IR early adopters employ quantity and syntactical reading ease manipulation as well as thematic content and verbal tone manipulation as impression management strategies. The results also suggest that such strategies depend not only on the level of firms’ performance but also on the type of performance (financial versus nonfinancial/sustainability). This paper adds to the limited literature on IR in sustainability accounting as well as to the research in mainstream financial accounting that examines disclosure quality using textual analysis.
210 citations
References
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Book•
01 Jan 1974TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
Abstract: This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.
31,082 citations
TL;DR: The semantic structure of texts can be described both at the local microlevel and at a more global macrolevel, and a model for text comprehension based on this notion accounts for the formation of a coherent semantic text base in terms of a cyclical process constrained by limitations of working memory.
Abstract: The semantic structure of texts can be described both at the local microlevel and at a more global macrolevel A model for text comprehension based on this notion accounts for the formation of a coherent semantic text base in terms of a cyclical process constrained by limitations of working memory Furthermore, the model includes macro-operators, whose purpose is to reduce the information in a text base to its gist, that is, the theoretical macrostructure These operations are under the control of a schema, which is a theoretical formulation of the comprehender's goals The macroprocesses are predictable only when the control schema can be made explicit On the production side, the model is concerned with the generation of recall and summarization protocols This process is partly reproductive and partly constructive, involving the inverse operation of the macro-operators The model is applied to a paragraph from a psychological research report, and methods for the empirical testing of the model are developed
4,800 citations
Posted Content•
TL;DR: The thirty-five chapters in this book describe various judgmental heuristics and the biases they produce, not only in laboratory experiments but in important social, medical, and political situations as well.
Abstract: The thirty-five chapters in this book describe various judgmental heuristics and the biases they produce, not only in laboratory experiments but in important social, medical, and political situations as well. Individual chapters discuss the representativeness and availability heuristics, problems in judging covariation and control, overconfidence, multistage inference, social perception, medical diagnosis, risk perception, and methods for correcting and improving judgments under uncertainty. About half of the chapters are edited versions of classic articles; the remaining chapters are newly written for this book. Most review multiple studies or entire subareas of research and application rather than describing single experimental studies. This book will be useful to a wide range of students and researchers, as well as to decision makers seeking to gain insight into their judgments and to improve them.
2,954 citations
Posted Content•
TL;DR: This article developed an alternative negative word list, along with five other word lists, that better reflect tone in financial text and linked the word lists to 10 K filing returns, trading volume, return volatility, fraud, material weakness, and unexpected earnings.
Abstract: Previous research uses negative word counts to measure the tone of a text. We show that word lists developed for other disciplines misclassify common words in financial text. In a large sample of 10 Ks during 1994 to 2008, almost three-fourths of the words identified as negative by the widely used Harvard Dictionary are words typically not considered negative in financial contexts. We develop an alternative negative word list, along with five other word lists, that better reflect tone in financial text. We link the word lists to 10 K filing returns, trading volume, return volatility, fraud, material weakness, and unexpected earnings.
2,638 citations
Additional excerpts
...These studies often use the “bag-of-words” approach to quantify tone (Henry 2008; Tetlock 2007; Loughran and McDonald 2011), ignoring the underlying narrative structure in which tone words are used....
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TL;DR: This paper pointed out that the "quality" of earnings is a function of the firm's fundamental performance and suggested that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.
2,633 citations