Management's performance justification and failure to meet earnings thresholds

S. Zhang, Walter Aerts

    Research output: Contribution to journalArticleScientificpeer-review

    Abstract

    We examine the intensity of management's performance justification as a remedial narrative impression management device, by investigating the association between behavioural earnings thresholds and causal language intensity on earnings-related outcomes in annual management commentary reports. Not meeting key earnings thresholds, such as positive earnings, positive earnings change and analyst earnings consensus, is argued to be a significant accountability predicament to which firms tend to respond with more intense use of causal language on performance in order to mitigate expected negative consequences of these events. Our results document a significant positive association between failure to meet earnings thresholds and causal language intensity. Moreover, we find that failure firms (not meeting earnings thresholds) tend to use more causal language in a weaker information environment. In addition, we document that firms that miss key earnings thresholds and use more causal language experience a less volatile abnormal stock return after the 10-K filing release. This study contributes to the impression management literature by evidencing incentives for the remedial use of causal language in management commentary.
    Original languageEnglish
    Pages (from-to)841-868
    JournalAccounting and Business Research
    Volume45
    Issue number6-7
    DOIs
    Publication statusPublished - 2015

    Fingerprint

    Management performance
    Justification
    Language
    Impression management
    Earnings changes
    Analysts
    Accountability
    Incentives
    Stock returns
    Information environment

    Keywords

    • earnings thresholds
    • causal language (intensity)
    • management commentary
    • accountability predicament

    Cite this

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    Management's performance justification and failure to meet earnings thresholds. / Zhang, S.; Aerts, Walter.

    In: Accounting and Business Research, Vol. 45, No. 6-7, 2015, p. 841-868.

    Research output: Contribution to journalArticleScientificpeer-review

    TY - JOUR

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    AU - Zhang, S.

    AU - Aerts, Walter

    PY - 2015

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    AB - We examine the intensity of management's performance justification as a remedial narrative impression management device, by investigating the association between behavioural earnings thresholds and causal language intensity on earnings-related outcomes in annual management commentary reports. Not meeting key earnings thresholds, such as positive earnings, positive earnings change and analyst earnings consensus, is argued to be a significant accountability predicament to which firms tend to respond with more intense use of causal language on performance in order to mitigate expected negative consequences of these events. Our results document a significant positive association between failure to meet earnings thresholds and causal language intensity. Moreover, we find that failure firms (not meeting earnings thresholds) tend to use more causal language in a weaker information environment. In addition, we document that firms that miss key earnings thresholds and use more causal language experience a less volatile abnormal stock return after the 10-K filing release. This study contributes to the impression management literature by evidencing incentives for the remedial use of causal language in management commentary.

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