Peer-based performance comparison and tone management

While performance comparison against peers is documented as a key decision-making factor in strategic management, its potential role as a strategic determinant of disclosure tone has so far been overlooked in the literature on narrative disclosures. In this study, we examine whether, and how, peer-based performance comparison (i.e. the comparison of earnings/cash flows of a firm with its peers) affects tone management. Using a measure of tone management based on 10-K filings over 1993–2013, we show that firms with performance falling below the peer-based benchmark engage in greater downward tone management in their earnings-related narrative disclosures, and the extent of this over-pessimism increases the further performance falls below the benchmark. We further document that the observed over-pessimism not only prompts security analysts to revise their earnings forecasts downward, but it is also associated with a higher probability of meeting or beating these forecasts (i.e. expectation management). This is the first study that links tone management with expectation management, in the context of peer-based performance comparison.