Management’s choice of tone in letters to shareholders: sincerity, bias and incentives
La elección del tono de la dirección en las cartas a los accionistas: sinceridad, sesgo e incentivos
Supporting Agencies
- this work was supported by the National Science Centre in Poland under Grant number 2014/13/B/HS4/01577
Abstract
This paper aims to identify the drivers of management reporting choices in a setting characterized by ownership concentration and weak enforcement. Previous research indicates, that tone of the letter to shareholders is correlated with performance. However, tone can be biased towards the positive when a company is highly responsive to stock market incentives or controlled by majority investors. Bias can be reduced by the monitoring activities of institutional investors in closely held companies. There are two major implications of the study. First, when managers bias the text, they lose the ability to communicate positive news about their company. Under rational expectations investors can detect bias based on known situational incentives and disregard the biased information. Second, the results suggest that managers manipulate tone strategically, rather than unconsciously, to satisfy the needs of key shareholder groups.
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