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Tone of language, financial disclosure, and earnings management: a textual analysis of form 20-F

Author

Listed:
  • Shuangyan Li

    (Xi’an Jiaotong University)

  • Guangrui Wang

    (Hanwang Technology Co., Ltd.)

  • Yongli Luo

    (Archie W. Dunham College of Business at Houston Baptist University)

Abstract

This study investigates the relationship between the tone of financial disclosures and managers’ earnings management behavior using Form 20-F filings of Chinese firms listed in the U.S. during 2002–2014. The results show that the proportion of positive, uncertain, or modal words used in financial disclosures is positively related to corporate earnings management, implying that managers attempt to conceal earnings management behavior by manipulating the tone of their financial reports. In addition, robustness tests are conducted using an alternative proxy for earnings management that considers the effects of the financial crisis and separately examines the information and non-information technology industries. The results suggest that the tone used in financial disclosures has informative value, and textual analysis can be an effective tool for identifying earnings management.

Suggested Citation

  • Shuangyan Li & Guangrui Wang & Yongli Luo, 2022. "Tone of language, financial disclosure, and earnings management: a textual analysis of form 20-F," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.
    • Handle: RePEc:spr:fininn:v:8:y:2022:i:1:d:10.1186_s40854-022-00346-5
    DOI: 10.1186/s40854-022-00346-5
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    More about this item

    Keywords

    Tone; Earnings management; Textual analysis; Financial statement;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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