Certainty and Realism in Earnings Announcements

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Abstract

We examine the linguistic content of earnings announcements (EAs) based on the timing of those announcements relative to the completion of the audit and the 10-K filing. Using DICTION to assess the linguistic content of EA disclosures for certainty and realism on a sample of companies from 2003 to 2013, we hypothesize and find that EAs released closer to (further from) audit completion convey greater (lower) reliability, measured by more (less) certain and realistic language. We also predict that such information is a more reliable, optimistic signal of future operations, and that an accounting restatement will decrease such language. We find that companies that restate financial reports from the prior year use less certain and realistic language in current year announcements. Finally, we show that using more reliable language in current year EAs, in the form of greater certainty and realism, translates to higher market valuation in future periods.

Authors

• James D Whitworth, University of South Florida

• Scott E Seavey, University of Nebraska-Lincoln

• Neal Michael Snow, Lehigh University