International Trade Friction and Firm Disclosure Tone: Evidence from China

Abstract

Synopsis The research problem This study examines whether international trade friction has an impact on firm disclosure tone. Motivation The past two decades have witnessed a large amount of trade friction worldwide. Under this background, the impact of trade friction on microenterprises is of great concern to researchers. Previous studies have shown that trade friction is related to firm operating or financial activities such as performance, investment, stock prices, loan financing, and employment. However, there are no published papers about how trade friction impacts the disclosure behaviors of firms subject to the friction. This study attempts to fill this void by investigating whether firms manage disclosure tone when they are subject to trade friction. The test hypotheses We test two competing hypotheses in this study. Our first hypothesis is that firms impacted by trade friction increase the positive tone of their information disclosure. Second, firms impacted by trade friction decrease the positive tone of their information disclosure. Target population This study should be of interest to firm managers, investors, creditors, and policy makers. Adopted methodology Ordinary least squares regressions and archival data. Analyses We conducted this study by using a sample of listed firms in China. Over the past two decades, China has been the world’s largest country subject to trade frictions. In addition, China’s weak institutional environment and language habit provide an ideal setting for this study. Firm disclosure tone is measured as the frequency difference between the positive and negative words scaled by total words in an annual report. We tested whether there is a positive/negative association between trade friction and firm disclosure tone. Findings We find that firms strategically increase their positive tone in annual reports when they are subject to trade friction. Further analyses reveal that the impact of trade friction on disclosure tone is more pronounced for smaller firms, firms with more financial constraints, and firms with less analyst following. In addition, this impact is attenuated when firms have stronger corporate governance. Finally, we show that using more positive tones help firms subject to trade friction improve short-term market valuation, obtain more bank loans, and have lower cost of debt.