Journal of Business Ethics

, Volume 126, Issue 1, pp 3–19 | Cite as

Is Tone at the Top Associated with Financial Reporting Aggressiveness?

  • Lorenzo PatelliEmail author
  • Matteo Pedrini


The discussion about the relationship between tone at the top and financial reporting practices has been primarily focused on the oversight role played by the board of directors and other structural elements of corporate governance. Another relevant determinant of tone at the top is the corporate narrative language, since it is a fundamental way in which the chief executive officer (CEO) enacts leadership. In this study, we empirically explore the association between financial reporting aggressiveness and five thematic indicators capturing different traits of ethical leadership from 535 annual letters to shareholders. We find that aggressive financial reporting is positively associated with CEO letters using a language which is resolute, complex, and not engaging. Our empirical findings highlight the importance of examining discretionary corporate narratives for the auditing process and the role of tone at the top in influencing accounting practices.


Financial reporting Accounting restatements Tone at the top Ethical leadership DICTION 



The authors would like to acknowledge Amanda Murphy, Hugh Grove, two anonymous reviewers, the discussant, and participants of the 2013 Accounting Ethics Symposium organized by the Centre for Accounting Ethics of the University of Waterloo for their helpful comments on previous versions of this manuscript.


  1. Abbott, J. L., Parker, S., & Presley, T. J. (2012). Female board presence and the likelihood of financial restatement. Accounting Horizons, 26, 607–629.CrossRefGoogle Scholar
  2. Abrahamson, E., & Amir, E. (1996). The information content of the President’s letter to shareholders. Journal of Business Finance & Accounting, 23, 1157–1182.CrossRefGoogle Scholar
  3. Ahmed, J., & Courtis, J. K. (1999). Association between corporate characteristics on mandatory disclosure compliance in annual reports: A meta-analysis. British Accounting Review, 31, 35–61.CrossRefGoogle Scholar
  4. Alexa, M., & Zuell, C. (2000). Text analysis software: Commonalities, difference and limitations: The results of a review. Quality & Quantity, 34, 299–321.CrossRefGoogle Scholar
  5. Amernic, J., & Craig, R. (2006). CEO-speak: The language of corporate leadership. Montreal and Kingston: McGill-Queen’s University Press.Google Scholar
  6. Amernic, J., Craig, R., & Tourish, D. (2010). Measuring and assessing tone at the top using annual report CEO letters. Edinburgh: The Institute of Chartered Accountants of Scotland.Google Scholar
  7. Badaracco, J. L, Jr. (2001). We don’t need another hero. Harvard Business Review, 79(8), 120–126.Google Scholar
  8. Baginski, S., Hassell, J., & Kimbrough, M. (2004). Why do managers explain their earnings forecasts? Journal of Accounting Research, 42, 1–29.CrossRefGoogle Scholar
  9. Bamber, L. S., Jiang, J., & Wang, I. Y. (2010). What’s my style? The influence of top managers on voluntary corporate financial disclosure. The accounting review, 85, 1131–1162.CrossRefGoogle Scholar
  10. Bannon, S., Ford, K., & Meltzer, L. (2010). How to instill a strong ethical culture. CPA Journal, 80(7), 56–58.Google Scholar
  11. Barry, D., & Elmes, M. (1997). Strategy retold: Toward a narrative view of strategic discourse. Academy of Management Review, 22, 429–452.Google Scholar
  12. Bass, B. M. (1985). Leadership and performance beyond expectations. New York: Free Press.Google Scholar
  13. Bénabou, R., & Tirole, J. (2002). Self-confidence and personal motivation. The Quarterly Journal of Economics, 117(3), 871–915.CrossRefGoogle Scholar
  14. Beneish, M. D. (1997). Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy, 16, 271–309.CrossRefGoogle Scholar
  15. Bens, D. A., Goodman, T. H., & Neamtiu, M. (2012). Does investment-related pressure lead to misreporting? An Analysis of Reporting Following M&A Transactions. The Accounting Review, 87, 839–865.CrossRefGoogle Scholar
  16. Berson, Y., Shaul, O., & Dvir, T. (2008). CEO values organizational culture and firm outcomes. Journal of Organizational Behavior, 29, 615–633.CrossRefGoogle Scholar
  17. Bligh, M. C., & Hess, G. D. (2007). The power of leading subtly: Alan greenspan, rhetorical leadership, and monetary policy. Leadership Quarterly, 18(2), 87.CrossRefGoogle Scholar
  18. Bollen, N. P. B., & Pool, V. K. (2012). Suspicious patterns in hedge fund returns and the risk of fraud. The Review of Financial Studies, 25, 2673–2702.CrossRefGoogle Scholar
  19. Bowen, R. M., Davis, A. K., & Matsumoto, D. A. (2005). Emphasis on pro forma versus GAAP earnings in quarterly press releases: Determinants, SEC intervention, and market reactions. Accounting Review, 80(4), 1011–1038.CrossRefGoogle Scholar
  20. Brown, M. E., & Treviño, L. K. (2006). Ethical leadership: A review and future directions. Leadership Quarterly, 17, 595–616.CrossRefGoogle Scholar
  21. Burns, J. M. (1978). Leadership. New York: Harper & Row.Google Scholar
  22. Cao, Y., Myers, L. A., & Omer, T. (2012). Does company reputation matter for financial reporting quality? Evidence from restatements. Contemporary Accounting Research, 29, 956–990.CrossRefGoogle Scholar
  23. Chen, S. (2010). The role of ethical leadership versus institutional constraints: A simulation study of financial misreporting by CEOs. Journal of Business Ethics, 93, 33–52.CrossRefGoogle Scholar
  24. Cho, C. H., Roberts, R. W., & Patten, D. M. (2010). The language of US corporate environmental disclosure. Accounting, Organizations and Society, 35, 431–443.CrossRefGoogle Scholar
  25. Clatworthy, M., & Jones, M. J. (2003). Financial reporting of good news and bad news: evidence from accounting narratives. Accounting and Business Research, 33(3), 171–185.CrossRefGoogle Scholar
  26. COSO. (1992). Executive summary: Internal control: Integrated framework. New York: AICPA.Google Scholar
  27. COSO. (1994). Internal Control—Integrated Framework. USA: AICPA.Google Scholar
  28. COSO. (2011). Embracing enterprise risk management: Practical approaches for getting started. USA: AICPA.Google Scholar
  29. Courtis, J. K. (1986). An investigation into annual report readability and corporate risk-return relationships. Accounting and Business Research, 16, 285–294.CrossRefGoogle Scholar
  30. Courtis, J. K. (1998). Annual report readability variability: tests of the obfuscation hypothesis. Accounting, Auditing & Accountability Journal, 11, 459–476.CrossRefGoogle Scholar
  31. Courtis, J. K. (2004). Corporate report obfuscation: Artefact or phenomenon? The British Accounting Review, 36, 291–312.CrossRefGoogle Scholar
  32. D’Aveni, R. A., & MacMillan, I. C. (1990). Crisis and the content of managerial communications: A study of the focus of attention of top managers in surviving and failing firms. Administrative Science Quarterly, 35, 634–657.CrossRefGoogle Scholar
  33. Davis, A. K., Piger, J. M., & Sedor, L. M. (2012). Beyond the numbers: Measuring the information content of earnings press release language. Contemporary Accounting Research, 29, 845–868.CrossRefGoogle Scholar
  34. de Kets Vries, M. (2003). Leaders, fools and impostors: Essays on the psychology of leadership (revised edition). New York: iUniverse.Google Scholar
  35. Dechow, P. M., & Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77, 35–59.CrossRefGoogle Scholar
  36. Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary Accounting Research, 28, 17–82.CrossRefGoogle Scholar
  37. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70, 193–225.Google Scholar
  38. Den Hartog, D. N., & Verburg, R. M. (1997). Charisma and rhetoric: Communicative techniques of international business leaders. Leadership Quarterly, 8, 355–391.CrossRefGoogle Scholar
  39. Eaglesham, J.: 2013, Accounting fraud targeted. With crisis-related enforcement ebbing, SEC is turning back to main street’, Wall Street Journal, C1 May 28.Google Scholar
  40. Fairhurst, G. T. (2007). Discursive leadership: In conversation with leadership psychology. London: Sage.Google Scholar
  41. Feldman, R., Govindaraj, S., Livnat, J., & Segal, B. (2010). Management’s tone change, post earnings announcement drift and accruals. Review of Accounting Studies, 15, 915–953.CrossRefGoogle Scholar
  42. Forester, J. (1985). Critical theory and planning practice. In John Forester (Ed.), Critical theory and public life (pp. 202–227). Cambridge: (MIT Press MA).Google Scholar
  43. Ge, W., Matsumoto, D., & Zhang, J. (2011). Do CFOs have style? An empirical investigation of the effect of individual CFOs on accounting practices. Contemporary Accounting Research, 28, 1141–1179.CrossRefGoogle Scholar
  44. Giessner, S., & van Quaquebeke, N. (2010). Using a relational models perspective to understand normatively appropriate conduct in ethical leadership. Journal of Business Ethics, 95, 43–55.CrossRefGoogle Scholar
  45. Grove, H., Patelli, L., Victoravich, L., & Xu, P. (2011). Corporate governance and performance in the wake of the financial crisis: Evidence from US commercial banks. Corporate Governance: An International Review, 19, 418–436.CrossRefGoogle Scholar
  46. Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9, 193–206.Google Scholar
  47. Hart, R. P. (2000). DICTION 5.0: The text analysis program. Thousand Oaks: Sage-Scolari.Google Scholar
  48. Hart, R. P. (2001). Redeveloping DICTION: Theoretical considerations. In M. D. West (Ed.), Theory, method, and practice in computer content analysis (pp. 43–60). New York: Springer.Google Scholar
  49. Henry, E. (2008). Are investors influenced by how earnings press releases are written? Journal of Business Communication, 45, 363–407.CrossRefGoogle Scholar
  50. Heracleous, L., & Barrett, M. (2001). Organizational change as discourse: communicative actions and deep structures in the context of information technology implementation. Academy of Management Journal, 44, 755–776.CrossRefGoogle Scholar
  51. Hobson, J. L., Mayew, W. J., & Venkatachalam, M. (2012). Analyzing speech to detect financial misreporting. Journal of Accounting Research, 50, 349–392.CrossRefGoogle Scholar
  52. Hooghiemstra, R. (2000). Corporate communication and impression management—new perspectives why companies engage in corporate social reporting. Journal of Business Ethics, 27, 55–68.CrossRefGoogle Scholar
  53. Huang, H., Rose-Green, E., & Lee, C. (2012). CEO age and financial reporting quality. Accounting Horizons, 26, 725–740.CrossRefGoogle Scholar
  54. Humpherys, S. L., Moffitt, K., Burns, M., Burgoon, J., & Felix, W. (2011). Identification of fraudulent financial statements using linguistic credibility analysis. Decision Support Systems, 50, 585–594.CrossRefGoogle Scholar
  55. Hunton, J. E., Hoitash, R., Thibodeau, J. C., & Bédard, J. (2011). The relationship between perceived tone at the top and earnings. Contemporary Accounting Research, 28, 1190–1224.CrossRefGoogle Scholar
  56. Hutton, A. P., Miller, G. S., & Skinner, D. J. (2003). The role of supplementary statements with management earnings forecasts. Journal of Accounting Research, 41, 867–890.CrossRefGoogle Scholar
  57. IFAC. (2007). Tone at the top and audit quality. New York: International Federation of Accountants.Google Scholar
  58. Johnson, W. (1946). People in quandaries: The semantics of personal adjustment. Lakeville: Institute of General Semantics.Google Scholar
  59. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29, 193–228.CrossRefGoogle Scholar
  60. Kaplan, S. E. (2001). Ethically related judgments by observers of earnings management. Journal of Business Ethics, 32(4), 285–298.CrossRefGoogle Scholar
  61. Kaplan, S. E., McElroy, J. C., Ravenscroft, S. P., & Shrader, C. B. (2007). Moral judgment and causal attributions: Consequences of engaging in earnings management. Journal of Business Ethics, 74(2), 149–164.CrossRefGoogle Scholar
  62. Kaplan, S. E., Pourciau, S., & Reckers, P. M. J. (1990). An examination of the effect of the president’s letter and stock advisory service information on financial decisions. Behavioral Research in Accounting, 2, 63–92.Google Scholar
  63. Keusch, T., Laury, H., Bollen, H., & Hassink, F. D. (2012). Self-serving bias in annual report narratives: An empirical analysis of the impact of economic crises. European Accounting Review, 21, 623–648.Google Scholar
  64. Kuhn, T. (2008). A communicative theory of the firm: Developing an alternative perspective on intra-organizational power and stakeholder relationships. Organization Studies, 29, 1227–1254.CrossRefGoogle Scholar
  65. Lamberton, B., Mihalek, P. H., & Smith, C. S. (2005). The tone at the top and ethical conduct connection. Strategic Finance, 86, 36–39.Google Scholar
  66. Larcker, D., Richardson, S., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82, 963–1008.CrossRefGoogle Scholar
  67. Larcker, D., & Zakolyukina, A. (2012). Detecting deceptive discussions in conference calls. Journal of Accounting Research, 50, 495–540.CrossRefGoogle Scholar
  68. Lehavy, R., Li, F., & Merkley, K. (2011). The effect of annual report readability on analyst following and the properties of their earnings forecasts. The Accounting Review, 86, 1087–1115.CrossRefGoogle Scholar
  69. Li, F. (2008). Annual report readability, current earnings and earnings persistence. Journal of Accounting and Economics, 45, 221–247.CrossRefGoogle Scholar
  70. Li, F. (2010). Textual analysis of corporate disclosures: A survey of the literature. Journal of Accounting Literature, 29, 143–165.Google Scholar
  71. Loughran, T., & Mcdonald, B. (2011a). When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. Journal of Finance, 66, 35–65.Google Scholar
  72. Loughran, T., & Mcdonald, B. (2011b). Barron’s red flags: Do they actually work? Journal of Behavioral Finance, 12, 90–97.CrossRefGoogle Scholar
  73. Mahadeo, S.: 2006, ‘How management can prevent fraud by example’, Fraud Nov./Dec.Google Scholar
  74. Marsh, C. (2013). Business executives perceptions of ethical leadership and its development. Journal of Business Ethics, 114, 565–582.CrossRefGoogle Scholar
  75. Martens, M. L., Jennings, J. E., & Jennings, P. D. (2007). Do the stories they tell get them the money they need? The role of entrepreneurial narratives in resource acquisition. Academy of Management Journal, 50, 1107–1132.CrossRefGoogle Scholar
  76. Matsumoto, D., & Chen, S. (2006). Favorable vs unfavorable recommendations: The impact on analyst access to management-provided information. Journal of Accounting Research, 44, 657–689.CrossRefGoogle Scholar
  77. McGuire, S. T., Omer, T. C., & Sharp, N. Y. (2012). The impact of religion on financial reporting irregularities. The Accounting Review, 87, 645.CrossRefGoogle Scholar
  78. Merchant, K. A. (1990). The effects of financial controls on data manipulation and management Myopia (pp. 297–313). Accounting: Organizations and Society.Google Scholar
  79. Merchant, K. A., & Rockness, J. (1994). The ethics of managing earnings: An empirical investigation. Journal of Accounting and Public Policy, 13, 79–94.CrossRefGoogle Scholar
  80. Merkl-Davies, D., & Brennan, N. (2007). Discretionary disclosure strategies in corporate narratives: Incremental information or impression management? Journal of Accounting Literature, 26, 116–196.Google Scholar
  81. Mihajlov, T. P., & Miller, W. F. (2012). Fraud at Buca di Peppo: A villa in Tuscany? Strategic Finance, 94, 40–46.Google Scholar
  82. Ober, S., Zhao, J. J., Davis, R., & Alexander, M. W. (1999). Telling it like it is: The use of certainty in public business discourse. Journal of Business Communication, 36, 280–300.CrossRefGoogle Scholar
  83. Osgood, C. E., Suci, G. J., & Tannenbaum, P. (1957). The measurement of meaning. Champaign: University of Illinois Press.Google Scholar
  84. Patelli, L., & Pedrini, M. (2013). Is the optimism in CEO’s letters to shareholders sincere? Impression management versus communicative action during the economic crisis. Journal of Business Ethics. doi: 10.1007/s10551-013-1855-3.
  85. Price, R. A, I. I. I., Sharp, N. Y., & Wood, D. A. (2011). Detecting and predicting accounting irregularities: a comparison of commercial and academic risk measures. Accounting Horizons, 25, 755–780.CrossRefGoogle Scholar
  86. Purda, L. & Skillicorn, D. (2012). Accounting variables, deception, and a bag of words: assessing the tool of fraud detection, working paper, Queen’s University.Google Scholar
  87. Reed, L. L., Vidaver-Cohen, D., & Colwell, S. R. (2011). A new scale to measure executive servant leadership: Development, analysis, and implications for research. Journal of Business Ethics, 101, 415–434.CrossRefGoogle Scholar
  88. Rotemberg, J., & Saloner, G. (2000). Visionaries, managers and strategic direction. Rand Journal of Economics, 31, 693–716.CrossRefGoogle Scholar
  89. Sama, L., & Shoaf, V. (2008). Ethical leadership for the professions: Fostering a moral community. Journal of Business Ethics, 78(1–2), 39–46.CrossRefGoogle Scholar
  90. Schaubroeck, J. M., Hannah, S. T., Avolio, B. J., Kozlowski, S. W. J., Lord, R. G., Linda, K., et al. (2012). Embedding ethical leadership within and across organization levels. Academy of Management Journal, 55, 53–78.CrossRefGoogle Scholar
  91. Schlenker, B. R. (1980). Impression management: The self-concept, social identity, and interpersonal relations. Monterey/California: Brooks/Cole.Google Scholar
  92. Schrand, C., & Zechman, S. (2012). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53, 311–329.CrossRefGoogle Scholar
  93. Segars, A. H., & Kogut, S. F. (2001). Strategic communication through the World Wide Web: An empirical model of effectiveness on the CEO’s letters to shareholders. Journal of Management Studies, 38, 535–556.CrossRefGoogle Scholar
  94. Shaw, G., Brown, R., & Bromiley, P. (1998). Strategic stories: How 3M is rewriting business planning. Harvard Business Review, 76, 41–50.Google Scholar
  95. Short, J. C., & Palmer, T. B. (2008). The application of DICTION to content analysis research in strategic management. Organizational Research Methods, 11, 727–752.CrossRefGoogle Scholar
  96. Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71, 289–315.Google Scholar
  97. Smith, M., & Taffler, R. (2000). The chairpersons’ statement: a content analysis of discretionary narrative disclosures. Accounting, Auditing and Accountability Journal, 13(5), 624–646.CrossRefGoogle Scholar
  98. Spears, L. C. (1995). Reflections on leadership: How Robert K. Greenleaf s theory of servant-leadership influenced today’s top management thinkers. New York: John Wiley.Google Scholar
  99. Subramanian, R., Insley, R., & Blackwell, R. (1993). Performance and readability: A comparison of annual reports of profitable and unprofitable corporations. Journal of Business Communication, 30, 49–61.CrossRefGoogle Scholar
  100. Sydserff, R., & Weetman, P. (2002). Developments in content analysis: a transitivity index and scores. Accounting, Auditing & Accountability Journal, 15, 523–545.CrossRefGoogle Scholar
  101. Tourish, D. (2008). Challenging the transformational agenda: Leadership theory in transition? Management Communication Quarterly, 21, 522–528.CrossRefGoogle Scholar
  102. Tourish, D., & Vatcha, N. (2005). Charismatic leadership and corporate cultism at Enron: The elimination of dissent, the promotion of conformity and organizational collapse. Leadership, 1, 455–480.CrossRefGoogle Scholar
  103. Turner, N., Barling, J., Epitropaki, O., Butcher, V., & Milner, C. (2002). Transformational leadership and moral reasoning. Journal of Applied Psychology, 87(2), 304–311.CrossRefGoogle Scholar
  104. Veenman, D., Hodgson, A., Van Praag, B., & Zhang, W. (2011). Decomposing executive stock option exercises: Relative information and incentives to manage earnings. Journal of Business Finance & Accounting, 38, 536–573.CrossRefGoogle Scholar
  105. Walumbwa, F. O., & Schaubroeck, J. (2009). Leader personality traits and employee voice behavior: Mediating roles of ethical leadership and work group psychological safety. Journal of Applied Psychology, 94(5), 1275–1286.CrossRefGoogle Scholar
  106. Weber, J. (2010). Assessing the tone at the top: The moral reasoning of CEOs in the automobile industry. Journal of Business Ethics, 92, 167–182.CrossRefGoogle Scholar
  107. Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2005). Organizing and the process of sense making. Organization Science, 16, 409–421.CrossRefGoogle Scholar
  108. Weintraub, E. (2002). Neoclassical economics. The concise encyclopedia of economics. Indiannapolis: Liberty Fund, Inc.Google Scholar
  109. Yuthas, K., Rogers, R., & Dillard, J. F. (2002). Communicative action and corporate annual reports. Journal of Business Ethics, 41, 141–157.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.School of Accountancy, Daniels College of BusinessUniversity of DenverDenverUSA
  2. 2.ALTIS-Postgraduate School Business and SocietyUniversità Cattolica del Sacro CuoreMilanItaly

Personalised recommendations