Managerial Self-References in Corporate Disclosures: An Analysis of MD&A
DOI:
https://doi.org/10.33423/jabe.v26i5.7290Keywords:
business, economics, self-reference, corporate disclosure, MD&A, restatementAbstract
This study examines strategic pronoun usage in the Management Discussion and Analysis (MD&A) section of annual reports. Through automated textual analysis of a large sample of MD&As, we find that managers of firms with higher earnings growth tend to use more self-inclusive pronouns(e.g., “ we, ” “ us, ” and “ our ”) and fewer self-exclusive words (e.g., “the company ”). This self-referential language pattern is associated with a higher likelihood of future financial restatements. Our findings contribute to the literature on corporate narrative disclosures and identify a potential new indicator of financial misstatements. The results have implications for investors, analysts, auditors, and regulators.
References
Aerts, W. (1994). On the use of accounting logic as an explanatory category in narrative accounting disclosures. Accounting, Organizations and Society, 19(4–5), 337–353.
Aerts, W. (2001). Inertia in the attributional content of annual accounting narratives. European Accounting Review, 10(1), 3–32.
Barton, J., & Mercer, M. (2005). To blame or not to blame: Analysts’ reactions to external explanations for poor financial performance. Journal of Accounting and Economics, 39(3), 509–533.
Bettman, J.R., & Weitz, B.A. (1983). Attributions in the board room: Causal reasoning in corporate annual reports. Administrative Science Quarterly, pp. 165–183.
Beyer, A., Cohen, D.A., Lys, T.Z., & Walther, B.R. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50(2–3), 296–343.
Billett, M.T., & Qian, Y. (2008). Are overconfident CEOs born or made? Evidence of self-attribution bias from frequent acquirers. Management Science, 54(6), 1037–1051.
Brown, S.V., & Tucker, J.W. (2011). Large‐sample evidence on firms’ year‐over‐year MD&A modifications. Journal of Accounting Research, 49(2), 309–346.
Chen, Z., & Loftus, S. (2019). Multi-method evidence on investors’ reactions to managers’ self-inclusive language. Accounting, Organizations and Society, 79, 101071.
Clatworthy, M., & Jones, M.J. (2003). Financial reporting of good news and bad news: Evidence from accounting narratives. Accounting and Business Research, 33(3), 171–185.
Elsbach, K.D., & Sutton, R.I. (1992). Acquiring organizational legitimacy through illegitimate actions: A marriage of institutional and impression management theories. Academy of Management Journal, 35(4), 699–738.
Financial Accounting Standards Board (FASB). (2001). Insights into enhancing voluntary disclosures.
Gervais, S., & Odean, T. (2001). Learning to be overconfident. The Review of Financial Studies, 14(1), 1–27.
Gong, S., Hao, Y., & Wang, X. (2024). Are performance explanations credible or strategic? Evidence from a large sample of MD&As. Journal of Corporate Accounting & Finance, 35(3), 241–258.
Hales, J., Kuang, X.I., & Venkataraman, S. (2011). Who believes the hype? An experimental examination of how language affects investor judgments. Journal of Accounting Research, 49(1), 223–255.
Healy, P.M., & Palepu, K.G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440.
Hennes, K.M., Leone, A.J., & Miller, B.P. (2008). The importance of distinguishing errors from irregularities in restatement research: The case of restatements and CEO/CFO turnover. The Accounting Review, 83(6), 1487–1519.
Hilary, G., & Menzly, L. (2006). Does past success lead analysts to become overconfident? Management Science, 52(4), 489–500.
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.
Kelley, H.H. (1967). Attribution theory in social psychology. Nebraska Symposium on Motivation, 15, 192–238.
Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2–3), 221–247.
Li, F. (2010a). Managers’ self-serving attribution bias and corporate financial policies. Retrieved from https://ssrn.com/abstract=1639005
Li, F. (2010b). The information content of forward-looking statements in corporate filings—A naïve Bayesian machine learning approach. Journal of Accounting Research, 48(5), 1049–1102.
Maass, A., Salvi, D., Arcuri, L., & Semin, G.R. (1989). Language use in intergroup contexts: The linguistic intergroup bias. Journal of Personality and Social Psychology, 57(6), 981–993.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661–2700.
Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), 20–43.
Merkl-Davies, D.M., & Brennan, N.M. (2007). Discretionary disclosure strategies in corporate narratives: Incremental information or impression management? Journal of Accounting Literature, 26, 116–194.
Miller, D.T., & Ross, M. (1975). Self-serving biases in the attribution of causality: Fact or fiction? Psychological Bulletin, 82(2), 213–225.
Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, pp. 197–216.
Securities and Exchange Commission (SEC). (1987). Securities Act Release No. 33-6711 (24.4.1987).
Securities and Exchange Commission (SEC). (1998). A Plain English Handbook: How to create clear SEC disclosure documents.
Securities and Exchange Commission (SEC). (2003). Interpretation: Commission guidance regarding management’s discussion and analysis of financial condition and results of operations. Release Nos. 33-8350; 34-48960; FR-72.
Sedikides, C., & Strube, M.J. (1997). Self-evaluation: To thine own self be good, to thine own self be sure, to thine own self be true, and to thine own self be better. Advances in Experimental Social Psychology, 29, 209–269.
Sievers, S., & Sofilkanitsch, C. (2019). Determinants of financial misreporting: A survey of the financial restatement literature. Retrieved from https://ssrn.com/abstract=3231740
Staw, B.M., McKechnie, P.I., & Puffer, S.M. (1983). The justification of organizational performance. Administrative Science Quarterly, 28, 582–600.
Tan, H.T., Wang, Y.E., & Zhou, B. (2014). When the use of positive language backfires: The joint effect of tone, readability, and investor sophistication on earnings judgments. Journal of Accounting Research, 52(1), 273–302.
Tausczik, Y.R., & Pennebaker, J.W. (2010). The psychological meaning of words: LIWC and computerized text analysis methods. Journal of Language and Social Psychology, 29(1), 24–54.