Essays on Textual Information in Corporate Disclosure

Park, Gitae and Young, Steven (2023) Essays on Textual Information in Corporate Disclosure. PhD thesis, Lancaster University.

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Abstract

Textual information in various corporate disclosures, despite its unstructured feature, provides useful information beyond numeric information contained in financial statements such as earnings and cash flows. Using textual analysis methods, I examine how firms convey their textual information to users and how their communication impacts capital market and business decisions. This dissertation consists of two self-contained studies. Chapter 2 examines the real effects of a UK disclosure mandate that, with the aim of enhancing performance reporting, requires a subset of London Stock Exchange firms to describe their strategic aspects of value creation, such as business models and strategies, in their annual reports. Using an instrumented difference-in-differences design, I find that compliance with this initiative, evidenced by more disclosures of performance measures and commentaries relating to business operations and strategies, promotes intangible investments. My analysis of external and internal control systems suggests that enhanced performance reporting promotes investments because it attracts long-term investors and reduces CEO pay sensitivity to earnings performance. Chapter 3 examines management discussion of accruals and cash flows in earnings call. Using earnings call transcripts of S&P 500 firms, I extract cash flows and earnings measures within management presentation and calculate the weighted average of accruals attention. I find that relative emphasis on accruals varies with the ability of accruals addressing the mismatching problem of cash flows and the limitation of accruals. However, I also find that relative emphasis on accruals also reflects managerial incentives to downplay unfavorable information and that such abnormal emphasis on accruals predicts one year ahead poor performance. The return analysis shows that the negative signal of abnormal emphasis on accruals is not incorporated into stock prices immediately. The evidence suggests that abnormal emphasis on accruals may obscure true picture of periodic performance and influence investors’ decision-making. Combined together, the two studies contribute to the accounting literature by deepening our understanding of business communication reflected in financial texts and the incentives and behaviours of managers and investors.