Managerial Sentiment And Corporate Information Disclosure:Evidence From A Natural Experiment

The market-oriented economy is a rational market in that rational behavior always leads the direction of economic development.However,the impact of irrational factors on the market is inevitable.Thus understanding the role of irrational factors that paly in the market can help to reduce the market distortion and alleviate the market frictions,which will have important practical value for establishing and perfecting the socialist market economic system.The capital market is essentially an information market,which acts as an intermediary role in the marketoriented economy.And information disclosure is the reference basis for the firm to establish contractual relationships with its stakeholders.Given the importance of firm disclosure practice in the information production process for the capital market,this study aims to identify the irrational factors in corporate disclosure process,which has great significance to the operation and sustainable development of the capital market and the entire economic market.Based on the upper echelon theory and limited rationality theory,this thesis focuses on the irrational behavior of the managers and examines the potential impact of managerial sentiment on corporate information disclosure.This research could help investors and other market participants to better understand corporate information disclosure behavior and eventually reveal the important role of irrational factors in capital market.Both neoclassical economic theory and agency theory assume managers are rational in their information disclosure process.And they believe managers have complete knowledge and forecasting ability,which can help them to make rational adjustments to the corporate accounting information after the trade-offs between costs and benefits,and then publish this information to the market.However,these theory ignores the behavioral biases caused by managerial psychological factors and cognitive deviations,which cannot withstand in the practical market.While prior studies rarely consider the differences caused by irrational factors in the corporate information disclosure process,this study aims to complement previous research by examining whether and how managerial sentiment affects corporate information disclosure.With reference to recent research,this study utilizes the terrorist attack as an exogenous shock that leads a variation in managerial sentiment of local firms.I focus on both mandatory information disclosure and voluntary information disclosure in order to develop a comprehensive understanding on how sentiment affects corporate reporting.Specifically,I investigate the effect of managerial sentiment on firms’ accounting conservatism and nonGAAP earnings disclosure.The research conclusions are summarized as follows:First,I find that the exogenous shocks of negative events lead to more pessimistic sentiment,resulting in more conservative information disclosure for the firms in following two quarters after the events.I also examine the specific transactions that reflect the accounting conservatism,and find that managerial pessimistic sentiment increases firm’s asset write-downs,goodwill impairment,and restructuring costs in the short term.In addition,following the related studies in psychology,this thesis conducts three cross-sectional tests from the perspective of attack characteristics,firm’s geographic location,and management characteristics.The research results show that(1)the effect of pessimistic sentiment on accounting conservatism is more pronounced when attack events are more salient;(2)attacks have caused more serious emotional shocks when firm’s headquarter is located in a state with a low murder rate,resulting in more conservative accounting information;and(3)pessimistic sentiment results in a higher level of conservatism when managers are less experienced.Second,I get similar conclusions when examining the effect of sentiment on firm’s voluntary information disclosure.Non-GAAP earnings is firm’s voluntary information provided by management to reflect the firm’s core and sustainable earnings.The results show that pessimistic sentiment causes negative expectations on firm’s core earnings,which in turn reduces the likelihood of firm’s non-GAAP earnings disclosure and lowers the magnitudes of non-GAAP earnings per share.Following the related research in psychology,I also extend the findings by carrying out cross-sectional tests from the perspective of attack characteristics,firm’s geographic location,and management characteristics.The research results show that the effect of pessimistic sentiment on non-GAAP earnings disclosure is more pronounced(1)when attack events are more salient;(2)when firm’s headquarters is located in a state with a low murder rate;and(3)when managers are less experienced.Third,from the perspective of decision usefulness,the initial purpose of firm’s information disclosure is to report reliable and relevant earnings information to meet the information needs of stakeholders and reduce information frictions in the capital market.It is an empirical question that whether managerial sentiment distorts earnings information or increases the earnings informativeness.Therefore,I futher examine the impact of managerial sentiment on corporate informativeness.Using the earnings-return model,I find that correlation between the quarterly mandatory earnings(or non-GAAP earnings)information and stock return significantly decreased.These results can be interpreted as that,managerial pessimistic sentiment leads to negatively biased earnings information,which distorts accounting information and ultimately reduces the valuation function of accounting information.This thesis contributes to previous studies by enriching the literature of management characteristics,accounting conservatism,and firm’s non-GAAP earnings reporting.It also provides theoretical basis and empirical evidence for future related research.In addition,it has some practical implications in the following three aspects:First,accounting information is an important reference to establish a contractual relationship between a firm and its stakeholders.It is of great practical significance to discuss what factors would affect the corporate disclosure behavior.This study examines the impact of managerial sentiment on firm’s information disclosure from the perspective of irrational biases.It extends the traditional interpretation of information disclosure from the perspective of agency theory.Previous studies investigate the motivation of information disclosure from the perspective of agency conflict and information asymmetry,which have ignored the potential impact of irrational factors on management behavior.The findings of this thesis would help investors and other market participants to better understand and interpret the information provided by firms.Given the importance of firm disclosure practice in the capital market,this study also helps market participants to better interpret the potential impact of behavioral biases on capital market.Second,this study enriches the empirical evidence of the upper echelon theory.Most previous research has focused on the demographic characteristics of management such as age,gender,and appearance characteristics;and their background characteristics such as education,occupation,marital status,and childhood experience.Although these features are easier to identify,they are indirect reflection of managerial psychological characteristics,cognitive differences,and risk preferences.This study investigates how psychological factors can exert influence on information disclosure by utilizing exogenous shocks to identify the variation of managerial sentiment.It provides evidence on how managerial sentiment can affect the firm’s information disclosure behavior from the perspective of psychological characteristics,which extends the research perspective of the upper echelon theory.Third,the research has positive enlightenment for firms,investors,and government.First,this study shows that managerial sentiment has led to subjective biases in information disclosure process and reduced earnings informativeness.This conclusion reminds firm to pay attention to the irrational behavior form managers and formulate corresponding policies to restrain the possible irrational biases.For example,strengthening the legality and compliance of corporate information disclosure may help to alleviate information deviation caused by management’s irrational behavior.Second,our study helps investors to better understand the firm’s information disclosure behavior.Specifically,investors and other market participants would know much better that management psychological biases is also an important determinant in corporate financial decisions.Finally,this study shows that negative exogenous shocks cause pessimistic sentiment and affect the firm’s information disclosure behavior,which in turn increase the information frictions in the capital market.This finding helps the government to better interpret the potential effect of market risks and uncertainties on listed firms and capital market,which in turn encourages government to evaluate and formulate relevant policies to create a more stable market environment.