Tone, Accounting Quality and Ex-Post Verification of UK Interim Management Statement Narratives

Abstract

This study contributes to the literature on the role of accounting quality in ex-post verification of the tone of financial disclosures. In particular, using a sample of Interim Management Statements (IMSs) in the context of UK interim reporting, this study provides evidence that firms with more positive tones are likely to disclose higher quality accounting information. Additionally, it provides evidence that as accounting quality increases, the tone is associated with lower levels of firms’ financial performance, growth opportunities and borrowing capacities. Subsequent market reaction tests indicate that with increasing accounting quality, the tone is also associated with lower levels of abnormal market returns between two and four months after the IMS disclosure, when verifiable quantitative disclosures such as the interim or annual reports are likely to be released. Collectively, these results are consistent with the argument that accounting quality plays a pivotal role in ex-post tonal verification. The findings also contribute to the Security and Exchange Commission’s (SEC) recent policy debate on the viability of IMSs as an alternative to US quarterly reports.