Institutional ownership and the informativeness of disclosure tone

Disclosure tone is an important qualitative characteristic of managerial disclosures. There is mixed evidence on the role of tone in disclosure strategy. While some studies highlight the informativeness of disclosure tone, other studies provide evidence consistent with an information obfuscation role. We conjecture that the mixed evidence may be because prior studies have not explicitly modeled the role of oversight over managerial disclosure. Using an exogenous shock to institutional ownership, an important source of managerial oversight, we find that abnormal disclosure tone is informative of a firm's future earnings and cash flows when institutional ownership is high. This positive association between institutional ownership and informativeness of abnormal tone is stronger when there is an increase in quasi-indexer institutional ownership and the contemporaneous performance is negative. Collectively, the results highlight a more complex role for disclosure tone. Abnormal disclosure tone could be reflective of managerial sentiment and convey forward-looking information to investors in the presence of greater oversight over managerial actions.