The Effect of Management Language Cohesion on Information Asymmetry and the Cost of Equity Capital: A Content Analysis of Earnings

• In Event: Doctoral Student Faculty Interchange I

Abstract

This study examines the association between language cohesion in earnings conference calls and information asymmetry/the cost of equity capital, using earnings conference call transcripts from 2005-2017. Using an emerging automated discourse analysis tool, Coh-Metrix, we explore Coh-Metrix measures as proxies for management language cohesion. Results indicate that larger values of two Coh-Metrix measures of conference calls, the word concreteness and temporality, are associated with lower information asymmetry and cost of equity capital. Further, adding traditional readability metrics to regression analysis only increase R2 by 0.05% over the benchmark model. In contrast, adding Coh-Metrix measures increases R2 by 0.9%-2.5% over the benchmark model. The results suggest that Coh-Metrix language cohesion measures are potentially stronger measures of linguistic complexity in accounting-relevant documents compared with traditional readability measures. This study contributes to the textual analysis literature in accounting by introducing a new discourse analysis method, Coh-Metrix, for assessing text cohesion and understandability.

Authors

• Suzanne Mullinnix, AAA

• Dan Stone, University of Kentucky

• Hong Xie, University of Kentucky

• Chuancai Zhang, University of Kentucky