Optimistic tone of MD&A and the relationship with reduced sales revenues in times of crisis
DOI:
https://doi.org/10.5007/2175-8069.2024.e100257Keywords:
MD&A, Optimism, Text analysis, CrisesAbstract
In times of crisis, companies may want to maintain their attractiveness by inducing users of accounting information through the tone of their financial reports. In this context, the study verified whether non-financial companies in the United States adopt an optimistic tone in their Management's Discussion and Analysis (MD&A) when they face reduced sales revenue in years of crisis. Considering a period from 2005 to 2022, the results of the diff in diffs regression with panel data indicated that in times of crisis, companies with reduced revenue tend to adopt an optimistic tone in their MD&A, suggesting that this tone may be a strategic response to revenue declines. This result is corroborated when considering two different samples: for medium-sized companies in the United States and Brazil. The research highlights the importance of analysts and investors monitoring financial data, in addition to MD&A analyses, especially in times of crisis, in order to reduce uncertainty in investment decisions. Furthermore, the discussion among regulators regarding the need for regulations that promote improvements in MD&A is ratified, as well as the need to control periods of crisis in determining the tone of financial reports released by companies.
References
Ahmed, Y., & Elshandidy, T. (2021). Effect of leverage deviation on choices and outcomes of public versus non-public acquisitions. International Journal of Finance and Economics, 26(3), 3436-3459. https://doi.org/10.1002/ijfe.1969
Alalwani, Z., & Mousa, G. A. (2020). Optimistic disclosure tone in corporate annual reporting and financial performance. Anais… In: International Conference on Decision Aid Sciences and Application (DASA). https://doi.org/ 10.1109/DASA51403.2020.9317105.
Alhadab, M., & Clacher, I. (2018). The impact of audit quality on real and accrual earnings management around IPOs. British Accounting Review, 50(4), 442-461. https://doi.org/10.1016/j.bar.2017.12.003
Alli, R., Nicolaides, R., & Craig, R. (2018). Detecting advance fee fraud emails using self-referential pronouns: A preliminary analysis. Accounting Forum, 42, 78–85. https://doi.org/10.1016/j.accfor.2018.01.003.
Alshorman, S. A. A., & Shanahan, M. (2022). The voice of profit: exploring the tone of Australian CEO’s letters to shareholders after the global financial crisis. Corporate Communications, 27(1), 127-147. https://doi.org/10.1108/CCIJ-12-2020-0169
Aly, D., El-Halaby, S., & Hussainey, K. (2018). Tone disclosure and financial performance: evidence from Egypt. Accounting Research Journal, 31(1), 63-74. https://doi.org/10.1108/ARJ-09-2016-0123
Arellano, M. (1987). Computing robust standard errors for within-groups estimators. Oxford Bulletin of Economics and Statistics, 49(4), 431–434. https://doi.org/10.1111/j.1468-0084.1987.mp49004006.x
Assefa, D. Z., Colovic, A., & Misganaw, B. A. (2022). Firm size, firm age and business model innovation in response to a crisis: evidence from 12 countries. International Journal of Innovation Management, 26(7), 1-26. https://doi.org/10.1142/S1363919622500542
Ataullah, A., Vivian, A., & Xu, B. (2018). Optimistic Disclosure Tone and Conservative Debt Policy. Abacus, 54(4), 445–484. https://doi.org/10.1111/abac.12140
Ayuningtyas, E. S., & Harymawan, I. (2021). Negative Tone and Readability in Management Discussion and Analysis Reports: Impact on The Cost of Debt. Jurnal Manajemen Teori Dan Terapan| Journal of Theory and Applied Management, 14(2), 129-146. https://doi.org/10.20473/jmtt.v14i2.26681
Azar, N., Zakaria, Z., & Sulaiman, N. A. (2019). The Quality of Accounting Information: Relevance or Value-Relevance? Asian Journal of Accounting Perspectives, 12(1), 1-21. https://doi.org/10.22452/ajap.vol12no1.1
Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129-152. https://doi.org/10.1257/jep.21.2.129
Bassyouny, H., Abdelfattah, T., & Tao, L. (2022). Narrative disclosure tone: A review and areas for future research. Journal of International Accounting, Auditing and Taxation, 49 (100511), 100511. https://doi.org/10.1016/j.intaccaudtax.2022.100511
Ben-Amar, W., & Belgacem, I. (2018). Do socially responsible firms provide more readable disclosures in annual reports? Corporate Social Responsibility and Environmental Management, 25(5), 1009-1018. https://doi.org/10.1002/csr.1517
Berns, J., & Simons, T. (2022). How Incongruence Between Managers’ Tone of Voice and Word Sentiment Influences Security Analysts. Academy of Management Proceedings, 2022(1). https://doi.org/10.5465/ambpp.2022.11420abstract
Bochkay, K., & Levine, C. B. (2019). Using MD&A to Improve Earnings Forecasts. Journal of Accounting, Auditing and Finance, 34(3), 458-482. https://doi.org/10.1177/0148558X17722919
Boudt, K., & Thewissen, J. (2019). Jockeying for Position in CEO Letters: Impression Management and Sentiment Analytics. Financial Management, 48(1), 77-115. https://doi.org/10.1111/fima.12219
Bradshaw, M. T., Drake, M. S., Myers, J. N., & Myers, L. A. (2012). A re-examination of analysts’ superiority over time-series forecasts of annual earnings. Review of Accounting Studies, 17(4), 944-968. https://doi.org/10.1007/s11142-012-9185-8
Brennan, N. M., & Merkl-Davies, D. M. (2018). Do firms effectively communicate with financial stakeholders? A conceptual model of corporate communication in a capital market context. Accounting and Business Research, 48(5), 553–577. https://doi.org/10.1080/00014788.2018.1470143
Bryan, S. H. (1997). Incremental Information Content of Required Disclosures Contained in Management Discussion and Analysis. In Source: The Accounting Review, 72(2), 285-301. https://www.jstor.org/stable/248557
Carsten, M. K., Bligh, M. C., Koles, J. C., & Lau, V. W. (2018). A follower-centric approach to the 2016 US presidential election: candidate rhetoric and follower attributions of charisma and effectiveness. Leadership, 0(0) 1–26. https://doi.org/10.1177/1742715018817930.
Caserio, C., Panaro, D., & Trucco, S. (2020). Management discussion and analysis: a tone analysis on US financial listed companies. Management Decision, 58(3), 510-525. https://doi.org/10.1108/MD-10-2018-1155
Castro, V. B. de, Gul, F. A., Muttakin, M. B., & Mihret, D. G. (2019). Optimistic tone and audit fees: Some Australian evidence. International Journal of Auditing, 23(2), 352-364. https://doi.org/10.1111/ijau.12165
Caylor, M., Cecchini, M., & Winchel, J. (2017). Analysts' qualitative statements and the profitability of favorable investment recommendations. Accounting, Organizations and Society, 57, 33-51. http://dx.doi.org/10.1016/j.aos.2017.03.005
Che, L., Hope, O. K., & Langli, J. C. (2020). How big-4 firms improve audit quality. Management Science, 66(10), 4552-4572. https://doi.org/10.1287/mnsc.2019.3370
Czerney, K., Lisic, L. L., Wu, B., & Zhang, I. (2020). Big 4 Auditors, Litigation Risk, and Disclosure Tone. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3002548
D’Amato, A., & Falivena, C. (2020). Corporate social responsibility and firm value: Do firm size and age matter? Empirical evidence from European listed companies. Corporate Social Responsibility and Environmental Management, 27(2), 909-924. https://doi.org/10.1002/csr.1855
Davis, A. K., Piger, J. M., & Sedor, L. M. (2012). Beyond the numbers: Measuring the information content of earnings press release language. Contemporary Accounting Research, 29(3), 845–868. https://doi.org/10.1111/j.1911-3846.2011.01130.x
Davis, A. K., Ge, W., Matsumoto, D., & Zhang, J. L. (2015). The effect of manager-specific optimism on the tone of earnings conference calls. Review of Accounting Studies, 20(2), 639–673. https://doi.org/10.1007/s11142-014-9309-4
Diamond, D. W. (1989). Reputation Acquisition in Debt Markets. Journal of Political Economy, 97(4), 828-862. https://doi.org/10.1086/261630
Du Toit, E., & Delport, P. W. J. (2021). Supplementary Mineral Resources and Mineral Reserves Reports: Readability and textual choice. Journal of the Southern African Institute of Mining and Metallurgy, 121(3),119–128. https://doi.org/10.17159/2411-9717/1381/2021
Du Toit, E., & Esterhuyse, L. (2021). Narrative Styles and Institutional Isomorphism in South African CEOs’ Shareholder Letters. The African Journal of Information and Communication, 27,1–17. https://doi.org/10.23962/10539/31369
Dutta, S., Fuksa, M., & Macaulay, K. (2019). Determinants of MD&A sentiment in Canada. International Review of Economics and Finance, 60(1), 130-148. https://doi.org/10.1016/j.iref.2018.12.017
Ebersberger, B., & Kuckertz, A. (2021). Hop to it! The impact of organization type on innovation response time to the COVID-19 crisis. Journal of Business Research, 124(1), 126-135. https://doi.org/10.1016/j.jbusres.2020.11.051
El-Deeb, M. S., Halim, Y. T., & Elbayoumi, A. F. (2022). Disclosure tone, corporate governance and firm value: evidence from Egypt. Asia-Pacific Journal of Accounting and Economics, 29(3), 793-814. https://doi.org/10.1080/16081625.2021.1934708
Fávero, L. P. (2015). Análise de Dados. 1 ed. Rio de Janeiro: Elsevier.
Ferrando, A., Marchica, M. T., & Mura, R. (2017). Financial Flexibility and Investment Ability Across the Euro Area and the UK. European Financial Management, 23(1), 87-126. https://doi.org/10.1111/eufm.12091
Fisher, R., van Staden, C. J., & Richards, G. (2020). Watch that tone: An investigation of the use and stylistic consequences of tone in corporate accountability disclosures. Accounting, Auditing and Accountability Journal, 33(1), 77-105. https://doi.org/10.1108/AAAJ-10-2016-2745
Fuertes-Callén, Y., & Cuellar-Fernández, B. (2019). Inter-relationship between firm growth and profitability in a context of economic crisis. Journal of Business Economics and Management, 20(1), 86-106. https://doi.org/10.3846/jbem.2019.6928
Grossman, S. J., & Hart, O. D. (1980). Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation. The Bell Journal of Economics, 11(1), 42. https://doi.org/10.2307/3003400
Habermas, J. (1984). The theory of communicative action: Volume 1: Reason and the rationalization of society (T. McCarthy, Trans.). Boston, MA: Beacon Press.
Habermas, J. (1987). The theory of communicative action: Volume 2: Lifeworld and system: A critique of functionalist reason (T. McCarthy, Trans.). Boston, MA: Beacon Press.
Habib, A., Ranasinghe, D., Muhammadi, A. H., & Islam, A. (2018). Political connections, financial reporting and auditing: Survey of the empirical literature. Journal of International Accounting, Auditing and Taxation, 31(1), 37-51. https://doi.org/10.1016/j.intaccaudtax.2018.05.002
Hart, R. P., & Carroll, C. E. (2015). Diction 7 – The text analysis program. Digitex, inc.
Hilton, A. S., & O’Brien, P. C. (2009). Inco ltd.: Market value, fair value, and management discretion. Journal of Accounting Research, 47(1), 179-211. https://doi.org/10.1111/j.1475-679X.2008.00314.x
Hoberg, G., & Lewis, C. (2017). Do fraudulent firms produce abnormal disclosure? Journal of Corporate Finance, 43(1), 58-85. https://doi.org/10.1016/j.jcorpfin.2016.12.007
Hsu, Y. L., & Yang, Y. C. (2022). Corporate governance and financial reporting quality during the COVID-19 pandemic. Finance Research Letters, 47(102778), 102778. https://doi.org/10.1016/j.frl.2022.102778
IASB – International Accounting Standards Board. (2018). Conceptual framework for financial reporting. London: IASB. Recuperado de: www.ifrs.org
IASB – International Accounting Standards Board. (2021). Snapshot: Exposure Draft Management Commentary. London: IASB. Recuperado de: www.ifrs.org
Iatrides, G. E. (2016). Financial reporting language in financial statements: Does pessimism restrict the potential for managerial opportunism? International Review of Financial Analysis, 45, 1–17. http://dx.doi.org/10.1016/j.irfa.2016.02.004
Iqbal, J., & Riaz, K. (2022). Predicting future financial performance of banks from management’s tone in the textual disclosures. Quality and Quantity, 56(4), 2691-2721. https://doi.org/10.1007/s11135-021-01216-5
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jiang, F., Lee, J., Martin, X., & Zhou, G. (2019). Manager sentiment and stock returns. Journal of Financial Economics, 132(1), 126-149. https://doi.org/10.1016/j.jfineco.2018.10.001
Koelbl, M. (2020). Is the MD&A of US REITs informative? A textual sentiment study. Journal of Property Investment and Finance, 38(3), 181-201. https://doi.org/10.1108/JPIF-12-2019-0149
Kuckertz, A., Brändle, L., Gaudig, A., Hinderer, S., Morales Reyes, C. A., Prochotta, A., Steinbrink, K. M., & Berger, E. S. C. (2020). Startups in times of crisis – A rapid response to the COVID-19 pandemic. Journal of Business Venturing Insights, 13(e00169), e00169. https://doi.org/10.1016/j.jbvi.2020.e00169
Laskin, A. V. (2018). The Narrative Strategies of Winners and Losers: Analyzing Annual Reports of Publicly Traded Corporations. International Journal of Business Communication, 55(3), 338-356. https://doi.org/10.1177/2329488418780221
Lemeunier, S. M. (2021). Information Asymmetry and the Mutual Fund Market. Quarterly Review of Economics and Finance, 81(1), 440-448. https://doi.org/10.1016/j.qref.2020.10.027
Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2–3), 221-247. https://doi.org/10.1016/j.jacceco.2008.02.003
Loughran, T., & McDonald, B. (2015). The Use of Word Lists in Textual Analysis. Journal of Behavioral Finance, 16(1), 1-11. https://doi.org/10.1080/15427560.2015.1000335
Malik, M. S., & Makhdoom, D. D. (2016). Does corporate governance beget firm performance in Fortune Global 500 companies? Corporate Governance (Bingley), 16(4), 747-764. https://doi.org/10.1108/CG-12-2015-0156
Marquez-Illescas, G., Zebedee, A. A., & Zhou, L. (2019). Hear Me Write: Does CEO Narcissism Affect Disclosure? Journal of Business Ethics, 159(2), 401-417. https://doi.org/10.1007/s10551-018-3796-3
Marshall, S. B. (1998). Content Analysis of Information Cited in Reports of Sell-Side Financial Analysts. CFA Digest, 28(2), 9–11. https://doi.org/10.2469/dig.v28.n2.254
Merkl-Davies, D. M., & Brennan, N. M. (2011). A conceptual framework of impression management: New insights from psychology, sociology and critical perspectives. Accounting and Business Research, 41(5), 415-437. https://doi.org/10.1080/00014788.2011.574222
Muttakin, M. B., & Khan, A. (2014). Determinants of corporate social disclosure: Empirical evidence from Bangladesh. Advances in Accounting, 30(1), 168-175. https://doi.org/10.1016/j.adiac.2014.03.005
Nicola, M., Alsafi, Z., Sohrabi, C., Kerwan, A., Al-Jabir, A., Iosifidis, C., Agha, M., & Agha, R. (2020). The socio-economic implications of the coronavirus pandemic (COVID-19): A review. International Journal of Surgery, 78(1), 185-193. https://doi.org/10.1016/j.ijsu.2020.04.018
Oliveira, M. G., Azevedo, G., & Oliveira, J. (2021). The Relationship between the Company’s Value and the Tone of the Risk-Related Narratives: The Case of Portugal. Economies, 9(70), 2-28. https://doi.org/10.3390/economies9020070
Pagliaruss, M. S., & Scotá, R. (2009). O uso do disclosure narrativo em relatórios anuais corporativos para inferência da continuidade das empresas. Revista de Contabilidade e Organizações, 3(5), 3-24. https://doi.org/10.11606/rco.v3i5.34729
Patelli, L., & Pedrini, M. (2014). Is the Optimism in CEO’s Letters to Shareholders Sincere? Impression Management Versus Communicative Action During the Economic Crisis. Journal of Business Ethics, 124(1), 19-34. https://doi.org/10.1007/s10551-013-1855-3
Paul, S., & Sharma, P. (2023). Does earnings management affect linguistic features of MD&A disclosures? Finance Research Letters, 51(103352), 1-9. https://doi.org/10.1016/j.frl.2022.103352
Pelger, C. (2020). The Return of Stewardship, Reliability and Prudence–A Commentary on the IASB’s New Conceptual Framework. Accounting in Europe, 17(1), 33-51. https://doi.org/10.1080/17449480.2019.1645960
Pouryousof, A., Nassirzadeh, F., Hesarzadeh, R., & Askarany, D. (2022). The Relationship between Managers’ Disclosure Tone and the Trading Volume of Investors. Journal of Risk and Financial Management, 15(12), 618. https://doi.org/10.3390/jrfm15120618
Rahman, S. (2023). Narrative tone and earnings persistence. Journal of International Accounting, Auditing and Taxation, 52(100562), 1-16. https://doi.org/10.1016/j.intaccaudtax.2023.100562
Rezaee, Z., Pouryousof, A., & Soleimani, A. (2024). An Examination of Management Tone in the MD&A in the Context of Fraud Pentagon. Journal of Forensic Accounting Research, 1–27. https://doi.org/10.2308/JFAR-2023-039
Rodini, L. (2023). What Was the Financial Crisis of 2007–2008? Causes, Outcomes & Lessons Learned. TheStreet. https://www.thestreet.com/dictionary/f/financial-crisis-2007-2008
STATA (2024). xtreg - Linear models for panel data. Retrieving from: https://www.stata.com/manuals/xtxtreg.pdf.
SEC – Securities and Exchange Commission. (2020). Regulation S-K (item 303). U.S: SEC. Retrieving form: www.sec.gov
SEC – Securities and Exchange Commission. (2023). Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures. Interpretive Rule. U.S: SEC. Recuperado de: www.sec.gov
Silva, C. A. T., Rodrigues, F. F., & Abreu, R. L. (2007). Análise dos relatórios de administração das companhias abertas brasileiras: um estudo do exercício social de 2002. Revista de Administração Contemporânea, 11(2), 71-92. https://doi.org/10.1590/s1415-65552007000200005
Shaharuddin, S. N. H., Mahmud, R., Mohd Azhari, N. K., & Perwitasari, W. (2021). Company Performance during Covid-19: Impact of Leverage, Liquidity and Cash Flows. Environment-Behaviour Proceedings Journal, 6(17), 11-16. https://doi.org/10.21834/ebpj.v6i17.2878
Shatonhoka, E. N. (2015). The Challenges of Managing an Organisation during and after the Economic Crisis. International Journal of Economics & Management Sciences, 04(02), 1-4. https://doi.org/10.4172/2162-6359.1000222
Srinivasan, P., & R., S. (2015). Narrative Analysis of Annual Reports - A Study of Communication Efficiency. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2611890
Stiglitz, J. E. (1972). Some aspects of the pure theory of corporate finance: Bankruptcies and take-overs. The Bell Journal of Economics, 3(2), 458. https://doi.org/10.2307/3003033
Sydserff, R., & Weetman, P. (2002). Developments in content analysis: A transitivity index and DICTION scores. In Accounting, Auditing & Accountability Journal 15(4), 523-545. https://doi.org/10.1108/09513570210440586
Tailab, M., & Burak, M. J. (2018). Is the rhetorical tone in a MD&A consistent with financial performance? Journal of Finance and Accountancy, 23(1), 1-18. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3251680
Tailab, M. M., & Burak, M. J. (2021). Examining the Effect of Linguistic Style in an MD&A on Stock Market Reaction. International Journal of Business Communication, 58(3), 430-458. https://doi.org/10.1177/2329488418762293
Trading Economics. (2023). Estados Unidos - PIB (anual). https://pt.tradingeconomics.com/united-states/full-year-gdp-growth
White House. (2022). The U.S. Economy and the Global Pandemic. White House. https://www.whitehouse.gov/wp-content/uploads/2022/04/Chapter-3-new.pdf
Wisniewski, T. P., & Yekini, L. S. (2015). Stock market returns and the content of annual report narratives. Accounting Forum, 39(4), 281-294. https://doi.org/10.1016/j.accfor.2015.09.001
Wu, D. X., Yao, X., & Guo, J. L. (2021). Is Textual Tone Informative or Inflated for Firm’s Future Value? Evidence from Chinese Listed Firms. Economic Modelling, 94, 513–525. https://doi.org/10.1016/j.econmod.2020.02.027
Yang, F., Huang, J., & Cai, Y. (2022). Tone of Textual Information in Annual Reports and Regulatory Inquiry Letters: Data from China. Emerging Markets Finance and Trade, 58(2), 417-427. https://doi.org/10.1080/1540496X.2021.1903870
Yuan, D., Shang, D., Ma, Y., & Li, D. (2022). The Spillover Effects of Peer Annual Report Tone for Firm Innovation Investment: Evidence from China. Technological Forecasting and Social Change, 177(121518), 121518. https://doi.org/10.1016/j.techfore.2022.121518
Zeghal, D., & Aoun, M. El. (2016). The Effect of the 2007/2008 Financial Crisis on Enterprise Risk Management Disclosure of Top US Banks. Journal of Modern Accounting and Auditing, 12(1), 28-51. https://doi.org/10.17265/1548-6583/2016.01.003
Zeng, Y., Chan, K. C., Chen, Y., & Li, L. (2022). Do analysts pay attention to managerial sentiment? Evidence from analysts’ following decisions and earnings forecasts. Borsa Istanbul Review, 23(2), 269-284. https://doi.org/10.1016/j.bir.2022.10.008
Zhang, Z., Luo, M., Hu, Z., & Niu, H. (2022). Textual Emotional Tone and Financial Crisis Identification in Chinese Companies: A Multi‐Source Data Analysis Based on Machine Learning. Applied Sciences, 12(13), 6662. https://doi.org/10.3390/app12136662
Zhou, D., Zhou, H., Bai, M., & Qin, Y. (2022). The COVID-19 outbreak and corporate cash-holding levels: Evidence from China. Frontiers in Psychology, 13, 942210. https://doi.org/10.3389/fpsyg.2022.942210
Downloads
Published
How to Cite
Issue
Section
License
Os Direitos Autorais para artigos publicados neste periódico são do autor, com direitos de primeira publicação para a Revista. Em virtude de aparecerem nesta Revista de acesso público, os artigos são de uso gratuito, com atribuições próprias, em aplicações educacionais, de exercício profissional e para gestão pública. A Revista adotou a licença Creative Commons Atribuição 4.0 Internacional - CC BY NC ND. Esta licença permite acessar, baixar (download), copiar, imprimir, compartilhar, reutilizar e distribuir os artigos desde que com a citação da fonte, atribuindo os devidos créditos de autoria. Nesses casos, nenhuma permissão é necessária por parte dos autores ou dos editores. Autores têm autorização para assumir contratos adicionais separadamente, para distribuição não-exclusiva da versão do trabalho publicada nesta revista (ex.: publicar em repositório institucional ou um capítulo de livro).
Esta obra está licenciada sob uma Licença Creative Commons.
