An Investigation into Managers\u27 Language Use in Earnings Press Releases

For years, researchers have examined financial data in corporate earnings announcements and their influence on market participants. More recently, a body of research has been developing recognizing the impact of narrative disclosures and managers\u27 deliberate language choices. However, no prior studies have investigated those language choices of managers which are likely unintentional in composing such narratives; language choices which, as previous research has revealed, escape conscious access. Using an empirically-grounded model which systematically classifies different predicates, I examined whether managers use systematic patterns of language when construing the earnings press release in a likely unintentional effort to channel or direct readers\u27 attention. I found that managers write positive information using a more concrete construal than negative information. Additionally, I used experimental data to examine whether these systematic differences lead to different perceptions of the company and its value as an investment alternative. Nonprofessional investors performed an analysis of an earnings press release where I manipulated the valence of the narrative as positive or negative and the construal of the narrative as abstract or concrete. I found that these manipulations had an interactive influence on investment decisions. Specifically, investors were least likely to invest when a negatively valenced narrative was written concretely. I also found that the influence of the narrative on the investment decision was direct and not the result of the narrative influencing the investors\u27 focus of attention on the accompanying financial statements. Additionally, I tested whether the investor judgments were due to intentional cognitive effects and found that the influence of the narrative on the investment decision was not conscious on the part of the investor. Lastly, I conducted an analysis of archival data to examine the relationship between managers\u27 language use in forward-looking statements of the earnings press release and future firm performance and the extent to which the market responds to these linguistic clues. Results from the analysis suggest that construal is predictive of future firm performance and the market is incorporating this into pricing for firms that meet or beat earnings expectations