Peer-based performance comparison and tone management

Pratik Goel and Oveis Madadian
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Pratik Goel: IÉSEG School Of Management [Puteaux]
Oveis Madadian: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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Abstract: 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.

Keywords: Tone management; peer-based performance comparison; narrative disclosures; performance feedback; expectation management (search for similar items in EconPapers)
Date: 2023-02-20
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Published in Applied Economics, 2023, 56 (12), pp.1440-1462. ⟨10.1080/00036846.2023.2176454⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04549897

DOI: 10.1080/00036846.2023.2176454

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