Tone Management

June 5, 2014 Leave a comment

THE ACCOUNTING REVIEW American Accounting Association

Vol. 89, No. 3 DOI: 10.2308/accr-50684 2014 pp. 1083–1113

Tone Management

Xuan Huang

Siew Hong Teoh

Yinglei Zhang

ABSTRACT: We investigate whether and when firms manage the tone of words in

earnings press releases, and how investors react to tone management. We estimate

abnormal positive tone,ABTONE, as a measure of tone management from residuals of a

tone model that controls for firm quantitative fundamentals such as performance, risk,

and complexity. We find that ABTONE predicts negative future earnings and cash flows,

is positively associated with upward perception management events, such as, just

meeting/beating thresholds, future earnings restatements, SEO, and M&A, and is

negatively associated with a downward perception management event, stock option

grants. ABTONE has a positive stock return effect at the earnings announcement and a

delayed negative reaction in the one and two quarters afterward. Balance sheet

constrained firms and older firms are more likely to employ tone management over

accruals management. Overall, the evidence is consistent with managers using strategic

tone management to mislead investors about firm fundamentals.

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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