This paper investigates whether managerial rhetoric in the Management Discussion and Analysis section of 10-K filings can help gauge the level of managerial opportunism in a firm. We find that the use of trust-related words is connected to inefficient investment decisions and poor operating performance. Furthermore, firms making more frequent use of trust-related words are subject to less monitoring by institutional investors or analysts. Their accounting also relies more heavily on discretionary accruals. These results are consistent with the notion that managerial rhetoric to advertise trustworthiness points towards agency problems plaguing the firm.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price includes VAT (USA)
Tax calculation will be finalised during checkout.
Ahern, K. R., & Sosyura, D. (2014). Who writes the news? Corporate press releases during merger negotiations. The Journal of Finance, 69(1), 241–291.
Akerlof, G. A., & Kranton, R. E. (2000). Economics and identity. The Quarterly Journal of Economics, 115(3), 715–753.
Allee, K., & Deangelis, M. D. (2015). The structure of voluntary disclosure narratives: Evidence from tone dispersion. Journal of Accounting Research, 53(2), 241–274.
Asker, J., Farre-Mensa, J., & Ljungqvist, A. (2015). Corporate investment and stock market listing: A puzzle? Review of Financial Studies, 28(2), 342–390.
Audi, R., Loughran, T., & McDonald, B. (2016). Trust, but verify: MD&A language and the role of trust in corporate culture. Journal of Business Ethics, 139(3), 551–561.
Barth, M. E., & Hutton, A. P. (2004). Analyst earnings forecast revisions and the pricing of accruals. Review of Accounting Studies, 9(1), 59–96.
Ben-Ner, A., Putterman, L., & Ren, L. (2011). Lavish returns on cheap talk: Two-way communication in trust games. The Journal of Socioeconomics, 40(1), 1–13.
Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2–3), 112–131.
Bochet, O., Page, T., & Putterman, L. (2006). Communication and punishment in voluntary contribution experiments. Journal of Economic Behavior and Organization, 36(1), 1–39.
Brickley, J. A., Lease, R. C., & Smith, C. W. Jr. (1988). Ownership structure and voting on antitakeover amendments. Journal of Financial Economics, 20(1–2), 267–291.
Brown, L., Griffin, P., Hagerman, R., & Zmijewski, M. (1987). Security analyst superiority relative to univariate time-series models in forecasting quarterly earnings. Journal of Accounting and Economics, 9(1), 61–87.
Brown, L. D., & Rozeff, M. S. (1978). The superiority of analyst forecasts as measures of expectations: Evidence from earnings. The Journal of Finance, 33(1), 1–16.
Capalbo, F., Frino, A., Lim, M. Y., Mollica, V., & Palumbo, R. (2018). The impact of CEO narcissism on earnings management. Abacus, 54(2), 210–226.
Chakrabarty, B., Seetharaman, A., Swanson, Z., & Wang, X. F. (2018). Management risk incentives and the readability of corporate disclosures. Financial Management, 47(3), 583–616.
Chance, D., Cicon, J., & Ferris, S. P. (2015). Poor performance and the value of corporate honesty. Journal of Corporate Finance, 33(C), 1–18.
Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter? Journal of Financial Economics, 86(2), 279–305.
Chen, T., Harford, J., & Lin, C. (2015). Do analysts matter for governance? Evidence from natural experiments. Journal of Financial Economics, 115(2), 383–410.
Clifford, C. P., & Lindsey, L. (2016). Blockholder heterogeneity, CEO compensation, and firm performance. Journal of Financial and Quantitative Analysis, 51(5), 1491–1520.
Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics, 51(3), 371–406.
Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate governance and pay-for-performance: The impact of earnings management. Journal of Financial Economics, 87(2), 357–373.
Craig, R., & Amernic, J. (2018). Are there language markers of hubris in CEO letters to shareholders? Journal of Business Ethics, 145(4), 973–986.
Crawford, V. P., & Sobel, J. (1982). Strategic information transmission. Econometrica, 50(6), 1431–1451.
Davis, A. K., Ge, W., Matsumoto, D., & Zhang, J. L. (2015). The effect of manager-specific optimism on the tone of earnings conference calls. Review of Accounting Studies, 20(2), 639–673.
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, 20(3), 845–868.
Davis, A. K., & Tama-Sweet, I. (2012). Managers’ use of language across alternative disclosure outlets: Earnings press releases versus MD&A. Contemporary Accounting Research, 29(3), 804–837.
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(Supplement), 35–59.
DePaulo, B. M. (1992). Nonverbal behavior and self-presentation. Psychological Bulletin, 111(2), 203–243.
Di Giuli, A., & Kostovetsky, L. (2014). Are red or blue companies more likely to go green? Politics and corporate social responsibility. Journal of Financial Economics, 111(2), 158–180.
Erickson, M., & Wang, S. (1999). Earnings management by acquiring firms in stock for stock mergers. Journal of Accounting and Economics, 27(2), 149–176.
Feldman, R., Govindaraj, S., Livnat, J., & Segal, B. (2010). Management’s tone change, post earnings announcement drift and accruals. Review of Accounting Studies, 15(4), 915–953.
Ferreira, M. A., & Matos, P. (2008). The colors of investors’ money: The role of institutional investors around the world. Journal of Financial Economics, 88(3), 499–533.
Festinger, L. (1957). A theory of cognitive dissonance. Stanford: Stanford University Press.
Festinger, L. (1962). Cognitive dissonance. Scientific American, 207(4), 93–107.
Fried, D., & Givoly, D. (1982). Financial analysts’ forecasts of earnings: A better surrogate for market expectations. Journal of Accounting and Economics, 4(2), 85–107.
Gneezy, U., Kajackaite, A., & Sobel, J. (2018). Lying aversion and the size of the lie. The American Economic Review, 108(2), 419–453.
Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The Quarterly Journal of Economics, 118(1), 107–156.
Greene, J. D., & Paxton, J. M. (2009). Patterns of neural activity associated with honest and dishonest moral decisions. Proceedings of the National Academy of Sciences of USA, 106(30), 12506–12511.
Guiso, L., Sapienza, P., & Zingales, L. (2015). The value of corporate culture. Journal of Financial Economics, 117(1), 60–76.
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. The Journal of Finance, 58(6), 2351–2374.
Henry, E. (2008). Are investors influenced by how earnings press releases are written? Journal of Business Communication, 45(4), 363–407.
Hope, O.-K., & Wang, J. (2018). Management deception, big-bath accounting, and information asymmetry: Evidence from linguistic analysis. Accounting, Organizations and Society, 70(C), 33–51.
Huang, X. Teoh, S. H., & Zhang, Y. (2014). Tone management. The Accounting Review, 89(3), 1083–1113.
Irani, R. M., & Oesch, D. (2013). Monitoring and corporate disclosure: Evidence from a natural experiment. Journal of Financial Economics, 109(2), 398–418.
Isaac, R. M., & Walker, J. M. (1988). Communication and free-riding behavior: The voluntary contribution mechanism. Economic Inquiry, 26(4), 585–608.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Jha, A. (forthcoming). Financial reports and social capital. Journal of Business Ethics. https://doi.org/10.1007/s10551-017-3495-5.
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.
Kandori, M. (1992). Social norms and community enforcement. Review of Economic Studies, 59(1), 63–80.
Karpoff, J. M., Lee, D. S., & Martin, G. S. (2008). The cost of cooking the books. Journal of Financial and Quantitative Analysis, 43(3), 581–612.
Karpoff, J. M., & Lott, J. R. (1993). The reputational penalty firms bear from committing criminal fraud. Journal of Law and Economics, 36(2), 757–802.
Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(1), 57–81.
Kim, C. F., Wang, K., & Zhang, L. (forthcoming). Readability of 10-K reports and stock price crash risk. Contemporary Accounting Research. https://doi.org/10.1111/1911-3846.12452.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400.
Kothari, P., Chance, C. M., & Ferris, S. P. (2018). Bragging rights: Does corporate boasting imply value creation? Working Paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3149899.
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197.
Larcker, D. F., & Zakolyukina, A. A. (2012). Detecting deceptive discussions in conference calls. Journal of Accounting Research, 50(2), 495–540.
Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2–3), 221–247.
Li, F. (2010). The information content of forward-looking statements in corporate filings—A naïve Bayesian machine learning approach. Journal of Accounting Research, 48(5), 1049–1102.
Lins, K. V., Servares, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785–1824.
Loughran, T., & McDonald, B. (2011a). When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. The Journal of Finance, 66(1), 35–65.
Loughran, T., & McDonald, B. (2011b). Barron’s red flags: Do they actually work? Journal of Behavioral Finance, 12(2), 1–21.
Loughran, T., & McDonald, B. (2014). Measuring readability in financial disclosures. The Journal of Finance, 69(4), 1643–1671.
Loughran, T., McDonald, B., & Yun, H. (2009). A wolf in sheep’s clothing: The use of ethics-related terms in 10-K reports. Journal of Business Ethics, 89(Supplement), 39–49.
McLean, R. D., Zhang, T., & Zhao, M. (2012). Why does the law matter? Investor protection and its effects on investment, finance, and growth. The Journal of Finance, 67(1), 313–350.
McMillan, J., & Woodruff, C. (2000). Private order under dysfunctional public order. Michigan Law Review, 98(8), 2421–2458.
McNichols, M. F. (2002). Discussion of the quality of accruals and earnings: The role of accrual estimation errors. Accounting Review, 77(Supplement), 61–69.
Mead, G. H. (1934). Mind, self, and society. Chicago: University of Chicago Press.
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42(3), 483–510.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.
Mortal, S., & Reisel, N. (2013). Capital allocation by public and private firms. Journal of Financial and Quantitative Analysis, 48(1), 77–103.
Myerson, R. (1979). Incentive-compatibility and the bargaining problem. Econometrica, 47(1), 61–73.
Perry, S., & William, T. (1994). Earnings management preceding management buyout offers. Journal of Accounting and Economics, 18(2), 157–179.
Price, S. M., Doran, J. S., Peterson, D. R., & Bliss, B. A. (2012). Earnings conference calls and stock returns: The incremental informativeness of textual tone. Journal of Banking and Finance, 36(4), 992–1011.
Rogers, J. L., Van Buskirk, A., & Zechman, S. L. (2011). Disclosure tone and shareholder litigation. The Accounting Review, 86(6), 2155–2183.
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315.
Tannenbaum, F. (1938). Crime and community. New York: Columbia University Press.
Teoh, S. H., Welch, I., & Wong, T. J. (1998a). Earnings management and the underperformance of seasoned equity offerings. Journal of Financial Economics, 50(1), 63–99.
Teoh, S. H., Welch, I., & Wong, T. J. (1998b). Earnings management and the long-run market performance of initial public offerings. The Journal of Finance, 53(6), 1935–1974.
Teoh, S. H., Wong, T. J., & Rao, G. (1998c). Are accruals during initial public offerings opportunistic? Review of Accounting Studies, 3(1–2), 175–208.
Vrij, A. (2008). Detecting lies and deceit: Pitfalls and opportunities (2nd ed.). Hoboken, NJ: Wiley.
Warfield, T. D., Wild, J. J., & Wild, K. L. (1995). Managerial ownership, accounting choices, and informativeness of earnings. Journal of Accounting and Economics, 20(1), 61–91.
Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1–2), 187–214.
Xie, B., Davidson III, W. N., & Dadalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316.
Xie, H. (2001). The mispricing of abnormal accruals. The Accounting Review, 76(3), 357–373.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185–211.
Yu, F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.
Zuckerman, M., DePaulo, B. M., & Rosenthal, R. (1981). Verbal and nonverbal communication of deception. In L. Berkowitz (Eds.), Advances in experimental social psychology (Vol. 14, pp. 1–59). New York: Academic.
We would like to thank two anonymous journal referees, Carol L. Osler, and participants of INFINITI 2018 in Poznań for their insightful comments and suggestions, which greatly improved the paper.
Electronic supplementary material
Below is the link to the electronic supplementary material.
About this article
Cite this article
Breuer, W., Knetsch, A. & Salzmann, A.J. What Does It Mean When Managers Talk About Trust?. J Bus Ethics 166, 473–488 (2020). https://doi.org/10.1007/s10551-018-4072-2
- Agency problems
- Behavioral finance
- Textual analysis