Do letters to shareholders inform or mislead? Insights from insider trading

Author/s Elena Beccalli, Saverio Bozzolan, Enrico Laghi, Marco Mattei
Publishing Year 2018 Issue 2018/2 Language English
Pages 37 P. 73-109 File size 589 KB
DOI 10.3280/FR2018-002004
DOI is like a bar code for intellectual property: to have more infomation click here

Below, you can see the article first page

If you want to buy this article in PDF format, you can do it, following the instructions to buy download credits

Article preview

FrancoAngeli is member of Publishers International Linking Association, Inc (PILA), a not-for-profit association which run the CrossRef service enabling links to and from online scholarly content.

Empirical studies consistently provide evidence that investors perceive qualitative disclosures as useful because they have significant effects on analysts’ forecast revisions and a firm’s share price. But these results leave unanswered the question of whether managers write qualitative disclosures to inform or mislead investors. Based on the signaling theory, we consider two actions by the same manager: one (insider trading) is a costly signal whilst the other (qualitative disclosure) is the cheap signal. We then verify whether they are coherent. We investigate the content and the verbal tone of the Letter of Shareholders and the insider trading from its author before and after the letter’s date of release and find that the costly signal (the insider trading) is not coherent with the cheap signal (the disclosure). This finding indicates that managers do not use qualitative disclosures to offer incremental information but that they might use them to mislead investors.

Keywords: Signaling theory, impression management, insider trading, letter to shareholder, verbal tone.

Jel codes: G11, G14, G30, M41

  1. Baginski S., Hassell J. and Hillison W. (2000), Voluntary causal disclosures: Tendencies and capital market reaction, Review of Quantitative Accounting and Finance, 15(4), pp. 371-389.
  2. Baginski S., Demers E., Wang C. and Yu J. (2012), Understanding the Role of Language in Management Forecast Press Releases, Working Paper.
  3. Bamber L. S., Jiang J. and Wang I. Y. (2010), What’s my style? The influence of top managers on voluntary corporate financial disclosure, The Accounting Review, 85(4), pp. 1131-1162.
  4. Barker R. M. (2010), Corporate governance, competition, and political parties. (Oxford: Oxford UP).
  5. Beasley M. (1996), An empirical analysis of the relation between the board of director composition and financial statement fraud, The Accounting Review, 71(2), pp. 443-466.
  6. Beneish M., Press E. and Vargus M. (2012), Insider Trading and Earnings Management in Distressed Firms, Contemporary Accounting Research, 29(1), pp. 191-220.
  7. Beneish M. D. and Vargus M. (2002), Insider trading, earnings quality, and accrual mispricing, The Accounting Review, 77(4), pp. 755-791.
  8. Berrone P., Cruz C., Gomez-Mejia L. and Larraza-Kintana M. (2010), Socioemotional wealth and corporate responses to institutional pressures: Do family-controlled firms pollute less?, Administrative Science Quarterly, 55, pp. 82-113.
  9. Brennan N. M., Guillamon-Saorin E. and Pierce A. (2009), Impression management: Developing and illustrating a scheme of analysis for narrative disclosures – A methodological note, Accounting, Auditing & Accountability Journal, 22(5), pp. 789-832. DOI: 10.1108/09513570910966379
  10. Brennan N. M. and Merkl-Davies D. M. (2011), A conceptual framework of impression management: new insights from psychology, sociology and critical perspectives, Accounting and Business Research, 41(5), pp. 415-437. DOI: 10.1080/00014788.2011.574222
  11. Clatworthy M. and Jones M. (2001), The effect of thematic structure on the variability of annual report reliability, Accounting, Auditing and Accountability Journal, 14(3), pp. 311-326. DOI: 10.1108/09513570110399890
  12. CONSOB (2013), 2013 Report on Corporate Governance of Italian Listed Companies, 18 November, Rome.
  13. Davis A. K., Ge W., Matsumoto D. and Zhang J. L. (2014), The effect of managerspecific optimism on the tone of earnings conference calls, Review of Accounting Studies, 20(2), pp. 639-673.
  14. Davis A. K., Piger J. and Sedor L. (2012), Beyond the numbers: measuring the information content of earnings press release language, Contemporary Accounting Research, 29(3), pp. 845-868.
  15. Davis A. and Tama Sweet I. (2012), Managers’ use of language across alternative disclosure outlets: earnings press releases versus MD&A, Contemporary Accounting Research, 29(3), pp. 804-837.
  16. DeFond M. L. and Park C. W. (2001), The reversal of abnormal accruals and the Market valuation of Earnings surprises, The Accounting Review, 76(3), pp. 375-404.
  17. Dyck A. and Zingales L. (2004), Private benefits of control: An international comparison, Journal of Finance, 59, pp. 537-600.
  18. Feldman R., Suresh G., Joshua L. and Benjamin S. (2010), Management’s tone change, post earnings announcement drift and accruals, Review of Accounting Studies, 15, pp. 915-953.
  19. Filatotchev I. and Bishop K. (2002), Board composition, share ownership and ‘underpricing’ of U.K. IPO firms, Strategic Management Journal, 23(10), pp. 941-955.
  20. García Osma B. and Guillamón-Saorín E. (2011), Corporate governance and impression management in annual results press releases, Accounting, Organizations and Society, 36(4-5), pp. 187-208.
  21. Godfrey J., Mather P. and Ramsay A. (2003), Earnings and Impression Management in Financial Reports: the case of CEO change, Abacus, 39(1), pp. 95-123. DOI: 10.1111/1467-6281.00122.
  22. Gomez-Mejia L.R., Larraza-Kintana M. and Makri M. (2003), The determinants of executive compensation in family-controlled public corporations, Academy of Management Journal, 46(2), pp. 226-237. DOI: 10.5465/30040616
  23. Henry E. and Leone A. (2016), Measuring Qualitative Information in Capital Markets Research: Comparison of Alternative Methodologies to Measure Disclosure Tone, The Accounting Review, 91(1), pp. 153-178.
  24. Jaggi B. and Tsui J. (2007), Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms, Journal of International Financial Management and Accounting, 18(3), pp. 192-222.
  25. Kohut G.F. and Segars A.H. (1992), The president’s letter to stockholders: an examination of corporate communication strategy, Journal of Business Communication, 29(1), pp. 7-21. DOI: 10.1177/002194369202900101
  26. Kravet T. and Muslu V. (2013), Textual risk disclosures and investors’ risk perceptions, Review of Accounting Studies, 18, pp. 1088-1122.
  27. LaPorta R., Lopez-de-Silanes F. and Shleifer A. (1999), Corporate ownership around the world, Journal of Finance, 54(2), pp. 471-517.
  28. Larcker D. F. and Zakolyukina A. A. (2012), Detecting Deceptive Discussions in Conference Calls, Journal of Accounting Research, 50, pp. 495-540.
  29. Leland H. and Pyle D. (1977), Informational asymmetries, financial structure, and financial intermediation, Journal of Finance, 32(2), pp. 371-388. DOI: 10.2307/2326770
  30. Lewis B. W., Walls J. L. and Dowell W. S. (2014), Difference in degrees: Ceo characteristics and firm environmental disclosure, Strategic Management Journal, 35(5), pp. 712-722.
  31. Li F. (2010), The Information content of forward-looking statements in corporate filings: A naive bayesian machine learning approach, Journal of Accounting Research, 48(5), pp. 1049-1102.
  32. Mather P. and Ramsay A. (2007), Do Board Characteristics Influence Impression Management through Graph Selectivity Around CEO Changes?, Australian Accounting Review, 17(42), pp. 84-95.
  33. Merkl-Davies D. and Brennan N. (2007), Discretionary disclosure strategies in corporate narratives: Incremental information or impression management?, Journal of Accounting Literature, 26, pp. 116-194.
  34. Mizruchi M.S. (1996), What interlocks do? An analysis, critique and assessment of research on interlocking directorates, Annual Review of Sociology, 22(1), pp. 271-298.
  35. Patelli L. and Pedrini M. (2014), Is the Optimism in CEO’s Letters to Shareholders Sincere? Impression Management Versus Communicative Action During the Economic Crisis, Journal of Business Ethics, 124(1), pp. 19-34.
  36. Peasnell K.V., Pope P.F. and Young S. (2005), Board monitoring and earnings management: Do outside directors influence abnormal accruals?, Journal of Business Finance and Accounting, 32(7-8), pp. 1311-1346.
  37. 686x.2005.00630.x. Prencipe A. and Bar-Yosef S. (2011), Corporate Governance and Earnings Management in Family-Controlled Companies, Journal of Accounting, Auditing and Finance, 26(2), pp. 199-227.
  38. Ramanna K. and Watts R. L. (2012), Evidence on the use of unverifiable estimates in required goodwill impairment, Review of Accounting Studies, 17(4), pp. 749-780.
  39. Rogers J. L., Van Buskirk A. and Zechman S. L. C. (2011), Disclosure Tone and Shareholder Litigation, The Accounting Review, 86(6), pp. 2155-2183.
  40. Schleicher T. and Walker M. (2010), Bias in the tone of forward-looking narratives, Accounting and Business Research, 40(4), pp. 371-390. DOI: 10.1080/00014788.2010.9995318
  41. Smith M. and Taffler R. (1995), The incremental effect of narrative accounting information in corporate annual reports, Journal of Business Finance & Accounting, 22(8), pp. 1195-1210.
  42. Smith M. and Taffler R. J. (2000), The chairman’s statement: A content analysis of discretionary narrative disclosures, Accounting, Auditing & Accountability Journal, 13(5), pp. 624-646. DOI: 10.1108/09513570010353738
  43. Spence M. (1973), Job Market Signalling, Quarterly Journal of Economics, 87, pp. 355-374.
  44. Spencer Stuart (2011), Spencer Stuart board index, --
  45. Yermack D. (1996), Higher market valuation of companies with a small board of directors, Journal of Financial Economics, 40(2), pp. 185-211.
  46. Yuthas K., Rogers R. and Dillard J. F. (2002), Communicative Action and Corporate Annual Reports, Journal of Business Ethics, 41, pp. 141-157.
  47. Zajac E. J. and Westphal J. D. (1996), Director Reputation, CEO board power, and the dynamics of board interlocks, Administrative Science Quarterly, 41, pp. 507-529. DOI: 10.2307/2393940
  48. Zhang Y. and Wiersema M. (2009), Stock market reaction to CEO certification: the signalling role of CEO background, Strategic Management Journal, 30(7), pp. 693-710.

Elena Beccalli, Saverio Bozzolan, Enrico Laghi, Marco Mattei, Do letters to shareholders inform or mislead? Insights from insider trading in "FINANCIAL REPORTING" 2/2018, pp 73-109, DOI: 10.3280/FR2018-002004