The Information Content of Discretionary Tone in Interim Management Statements

Abstract

This paper contributes to the literature on tone management by providing evidence that the discretionary tone of financial disclosures is more incrementally informative of future performance in the third quarter of the financial year than in the first quarter. Using a sample of Interim Management Statements (IMSs) from the period 2008 – 2013, I show that the discretionary tone provides incremental information about year-end earnings and cash flows in the third quarter but often provides noise in the first quarter, with no indication of strategic tone management over and above discretionary accruals. Additionally, in the third quarter, the discretionary tone of negative statements is incrementally informative of both year-end earnings and cash flows but the discretionary tone of positive statements is incrementally informative of year-end earnings only. In both the first and third quarters, the discretionary tone is positively associated with market returns at the time of IMS announcements. The market reaction two months after the IMS announcement is positively associated with the incrementally informative third-quarter discretionary tone, although it is unrelated to the noisier first-quarter discretionary tone. The results are sustained after a series of robustness tests.