The impact of tone management on investor judgments: evidence from ICFR reports
ISSN: 1030-9616
Article publication date: 27 January 2023
Issue publication date: 2 February 2023
Abstract
Purpose
In preparing company financial statements, management is required to evaluate internal controls and disclose any material weaknesses in the internal control over financial reporting (ICFR) report. This study aims to examine how the tone of the details management provides to describe a material weakness in its ICFR report impacts investors’ perceptions of the severity of the material weakness and the desirability of the company as a potential investment.
Design/methodology/approach
This study uses an experimental design that manipulates whether the company’s ICFR report includes a negatively-toned detail to describe a material weakness disclosed in the report. Participants read the report and answer questions concerning their perceptions of the desirability of the company as an investment and the severity of the material weakness.
Findings
This study finds that using negatively-toned details to describe a material weakness, as opposed to an absence of those details, decreases investment desirability due to an increase in the perceived severity and number of distinct problems in ICFR.
Originality/value
This study extends prior research by showing that the tone of details used to describe a material weakness, not just the quantity of details, impacts investors’ decision-making. This study shows that management can carefully construct their ICFR report to avoid tone and potentially mitigate the negative effect of disclosing ineffective ICFR.
Keywords
Acknowledgements
This paper is based on the author’s dissertation completed at the University of Massachusetts Amherst. The author wants to thank his dissertation co-chairs Yao Yu and David Piercey for their invaluable guidance and help. The author appreciates the helpful comments from other members of his dissertation committee: Elaine Wang and Andrew Cohen. The author also appreciates the help and support from Chez Sealy, Jenny McCallen, Nikki MacKenzie, Kyle Stubbs, Yushi Tian, Scott Jackson, Aubrey Whitfield, Jeffrey Pickerd and workshop participants at the University of Massachusetts Amherst, Eastern Illinois University, University of Mississippi, University of Louisiana Lafayette and Texas A&M University Corpus Christi.
Citation
Starliper, M. (2023), "The impact of tone management on investor judgments: evidence from ICFR reports", Accounting Research Journal, Vol. 36 No. 1, pp. 77-91. https://doi.org/10.1108/ARJ-06-2021-0179
Publisher
:Emerald Publishing Limited
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