Tone Concavity around Expected Earnings
Carlo D’Augustaa
Middle Tennessee State University
Matthew D. DeAngelisb
Georgia State University
March 2019
Abstract
We examine whether the relationship between managerial tone and earnings performance
depends on the performance of the firm relative to earnings expectations. Using both annual
changes in earnings and the difference between realized earnings and analyst consensus
forecasts, we find evidence of “tone concavity” around earnings expectations. Specifically, the
covariance between managerial tone and earnings performance is positive when earnings are
below expectations, but negative when earnings meet or exceed expectations. We interpret our
results to suggest that managers downplay positive changes in earnings to attenuate future
growth expectations. We also find that tone concavity is significantly attenuated by managers’
career concerns and accounting conservatism, but unrelated to litigation risk. Our results indicate
that the effect of earnings performance on disclosure tone is complex and reflects managers’
incentives to manage expectations.