CEO Tenure and Tone Management


Speaker


Abstract

This study examines the direction and incidence of tone management at different stages over the CEO’s tenure and differentially for high-ability CEOs. From a textual analysis of the 10-K filings of US non-financial firms during 1993-2010, I compute abnormal tone as the residual term from a regression of the tone of words on its determinants, and then use it as a measure of strategic tone management – a linguistic tool often employed to influence the perceptions of investors and analysts. I find that, on average, CEOs manage the tone downwards (more pessimistic) in the ir early years of service than in the later years, and this relation is more pronounced for firms in high-litigation industries. Furthermore, the proportion of forward-looking sentences to total sentences in the 10-K filing is significantly lower in the early years. Since optimistic disclosures increase the likelihood of shareholder litigation (Rogers et al. 2011), these results suggest that new CEOs are concerned about litigation more in their early years, when the market is still assessing their ability. Interestingly, high-ability CEOs manage tone upwards (more optimistic) in their early years compared to later years. Furthermore, while departing CEOs also manage tone downwards (on average), I find that it is only the CEOs of balance sheet-constrained firms (proxy for the limits to accruals management) who adopt a more optimistic tone in their final year. Finally, the paper offers mixed evidence with regards to the 10-K readability in the early versus later years of the CE O’s tenure.