Positive Tone in Management Reports and Volatility of Stock Returns

Abstract

This article aims to analyse the effects of positive tone in management reports on stock return volatility. It is expected that this article contributes to the literature about disclosure by proposing an objective textual content analysis of management reports, focussing on optimistic words or expressions employed by firms and their effect on stock return volatility. The sample consisted of management reports and financial data from 576 different Brazilian firms’ stocks. Regarding volatility, our measure is based on daily stock returns from 1 April 2011 to 23 October 2020. The data related to positive tone and control variables were based on the fiscal years 2010–2019. Therefore, the database contains 3,945 stock-year observations. The study hypothesis was tested through a regression model with panel data. The main results suggest that companies with higher positive disclosure tone scores do not necessarily present lower stock return volatility in the subsequent period. The objective content of financial reports (for example, in relation to profitability) seems to be related to stock volatility; however, the tone of subjective expressions does not represent the main determinant of stock volatility.