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Contemporaneous verification of language: evidence from management earnings forecasts

Author

Listed:
  • Stephen Baginski

    (University of Georgia)

  • Elizabeth Demers

    (University of Virginia)

  • Chong Wang

    (Naval Postgraduate School)

  • Julia Yu

    (Nanyang Technological University)

Abstract

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.

Suggested Citation

  • Stephen Baginski & Elizabeth Demers & Chong Wang & Julia Yu, 2016. "Contemporaneous verification of language: evidence from management earnings forecasts," Review of Accounting Studies, Springer, vol. 21(1), pages 165-197, March.
    • Handle: RePEc:spr:reaccs:v:21:y:2016:i:1:d:10.1007_s11142-015-9347-6
    DOI: 10.1007/s11142-015-9347-6
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    More about this item

    Keywords

    Management forecasts; Linguistic tone; Cheap talk; Management incentives;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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