Tone Analysis and Earnings Management

Abstract

In this study, we examine empirically whether the tone employed in earnings press releases is related to the manager’s choice of the sign and amount of the discretionary earnings reported. The results show that managers of firms with high abnormal accruals and firms just meeting or beating earnings targets tend to use more positive words in earnings press releases to hype the discretionary accounting numbers that they subsequently report in financial statements to the SEC. This evidence implies that managers strategically use tone as a complement to earnings management to manage investor perceptions.