Review of Accounting Studies

, Volume 21, Issue 1, pp 165–197 | Cite as

Contemporaneous verification of language: evidence from management earnings forecasts

  • Stephen Baginski
  • Elizabeth Demers
  • Chong Wang
  • Julia Yu


Research documents that linguistic tone is incrementally informative about stock returns. What remains a puzzle is the mechanism by which investors can assess its credibility. We examine whether contemporaneous information in management earnings forecasts serves as a timely alternative to ex post verification. We document that ex post verifiable quantitative news in unbundled forecasts, and characteristics of the linguistic tone itself, affect investors’ pricing of tone. Consistent with higher quality signals enhancing the credibility of contemporaneous lower quality signals, we find that quantitative news verifies the associated linguistic tone; when the two signals have the same sign, the price effect of tone is stronger. Furthermore, the pricing attenuation of tone is increasing in the imprecision of the quantitative forecast, suggesting that lower forecast quality compromises the quantitative signal’s credibility enhancement. Managerial incentives to inflate tone lead to the verification effect being greater for optimistic language, while management’s use of hyperbole results in attenuation of the tone’s pricing.


Management forecasts Linguistic tone Cheap talk Management incentives 

JEL Classification

G14 D82 M41 



We thank workshop participants at University of Bocconi, University of Virginia (Darden), EDHEC, ESSEC, Exeter, IE Business School, the University of Notre Dame, the Stockholm School of Economics, the University of Verona, the 7th Interdisciplinary Workshop on Intangibles, Intellectual Capital & Extra-Financial Information in Warsaw, the 2012 Junior Faculty Accounting Research Symposium in Singapore, conference participants at the American Accounting Association (AAA) Annual Meetings in Denver, the European Accounting Association (EAA) Annual Congress in Rome, the University of Melbourne New Accounting Faculty Conference, and the 1st Accounting Conference at Catolica-Lisbon, Ben Ayers, Stephen V. Brown (AAA discussant), John Hassell, Karol Marek Klimczak (EAA discussant), Clive Lennox, Claudine Mangen, Shiheng Wang (University of Melbourne conference discussant), and Eric Yeung for helpful comments. We appreciate the programming assistance provided by Rajiv Jayaraman of Knolscape as well as Rashid Ansari. We thank Mary Boldrini, Pascale Gadroy, Cécile Maciulis, and Bingyun Wang for their research assistance and Craig Carroll for processing our text files using the Diction software. Demers is grateful for the research funding provided by the INSEAD Alumni Fund. Earlier versions of this study were circulated under the title “Understanding the Role of Language in Management Forecast Press Releases.”


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Stephen Baginski
    • 1
  • Elizabeth Demers
    • 2
  • Chong Wang
    • 3
  • Julia Yu
    • 4
  1. 1.Terry College of BusinessUniversity of GeorgiaAthensUSA
  2. 2.Darden Graduate School of BusinessUniversity of VirginiaCharlottesvilleUSA
  3. 3.Naval Postgraduate SchoolMontereyUSA
  4. 4.Nanyang Business SchoolNanyang Technological UniversitySingaporeSingapore

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