Qualitative Management Disclosures and Market Sentiment

• In Event: Disclosure and the Market

Abstract

We show that management’s qualitative disclosures in annual (10-K) and quarterly (10-Q) reports filed with the Securities and Exchange Commission (SEC) reflect market sentiment. The correlation between the tone of financial reports and the investor sentiment index developed by Baker and Wurgler (2006) is 0.617, and investor sentiment explains 37.7% of the time-series variation in management tone. As a result, management’s qualitative disclosures are systematically biased: when managers are more optimistic as a group, future earnings and stock returns are lower (at both the firm level and the aggregate level). This bias reduces the usefulness of management’s qualitative disclosures.

Authors

• Khrystyna Bochkay, university of miami

• Valentin Dimitrov, Rutgers Business School, Rutgers University