Managerial ability, tone of earnings announcements, and market reaction

Abstract

Purpose The purpose of this paper is to examine the effect of managerial ability on the tone of earnings announcements and on the market response to the tone. Design/methodology/approach This study constructs a model of the determinants of earnings announcement tone in order to examine whether managerial ability plays a significant role in determining earnings announcement tone. Further, to test whether the market response to the tone of earnings announcements is affected by managerial ability, this study also examines the interactive term between earnings announcement tone and managerial ability. The tone of earnings announcements is measured using the spread in the proportion of positive and negative words. Managerial ability is measured using the managerial ability rank developed by Demerjian et al. (2012). Findings More able management teams use a more positive tone in their earnings announcements. Stock markets have more pronounced positive reactions to positive tones in the earnings announcements issued by companies with more able management teams. Originality/value This study identifies managerial ability as a previously unrecognized determinant of tone in earnings announcements and of the stock price reaction to earnings announcements.