A Complementary Cooperation Or A Meaningless Cover-up?

Securities analysts play an key role on information mining,processing anddelivering,the quality of their earnings forecast directly affects investors' value judgment on the company.Financial information is an important source for analysts'earnings forecast,its quality directly affect the analysts' forecast accuracy.However,with the innovation of products and business models,financial information can't fully reflect the company's actual operating performance,analysts need more non-financial and forward-looking information.Non-financial' information provides the company's strategic planning,competitive landscape,research and brand reputation information,which can interpret and supply financial information.Forward-looking information describes the future prospects of the company,which can help analysts to predict the company's future earnings better.The director's report reveals non-financial and forward-looking information,naturally becomes an important source for analysts' earnings forecast.Combining with the Chinese habits and financial terms,I summarize 1425 positive words and 1583 negative words.Using the director's report of all A-share listed companies from 2002-2014,this paper applies textual analysis to estimate abnormal positive tone,ABTONE,of each report,as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such as performance,risk,and complexity.I find ABTONE is significantly positively associated with the number of analysts following,and is negatively associated with the analysts' forecast error and divergence.Then I divide the whole sample into high quality company group and inferior company group to study the influence mechanism of ABTONE on analysts' forecast behavior.My study finds that for the high quality companies,ABTONE will lead to more positive and accurate forecasts,the analysts'diverge is narrower,indicating that a positive bias in tone used by managers is to signal the private information.But for the inferior companies,ABTONE will lead to more negative and accurate forecasts,the analysts' diverge is narrower,indicating that a positive bias in tone used by managers is to mask poor current performance.The contribution of this paper lies in:(1)The director's report contains rich information,can interpret and supply financial information better.The previous domestic researches on accounting text generally adopt questionnaire survey or experimental method,this paper does empirical research under large sample,by using textual analysis to quantify the tone feature,which enriches the field of textual analysis research.(2)This paper is the first case to define,measure and empirical test the tone management of the director's report.Under the control of the company's operating performance,growth and other fundamental factors,this paper studies the information effect of ABTONE,which provides a new perspective for academic study.(3)The empirical result shows that ABTONE of the director's report will affect analysts' earnings forecast behavior significantly,the accounting text with information is valuable,this find helps to study how securities analysts interpret the textual information.