Essays on Corporate Textual Disclosures

The dissertation consists of two chapters on corporate textual disclosures. In the first chapter, I examine the role of secondary market participants in shaping disclosure tone. Managers use disclosure tone as a strategic tool to manage investors’ expectation and demand for information. I provide evidence that investors’ actions can in turn exercise a disciplining effect on tone management. Using an exogenous relaxation in the short-selling constraints from Regulation-SHO, I find that short-selling pressure reduces tone management. Greater short selling pressure results in less optimism in tone unrelated to fundamentals, and in disclosures about the past rather than the future. This reduction in tone management is stronger for firms with higher short-selling constraints pre-SHO, overoptimistic and overconfident managers, and lower analyst coverage.

In the second chapter, I and my co-authors construct a weighted word-count based measure to capture the quantity of a firm's 10-K narrative R&D-related disclosures and document a persistent and significant (statistical and economic) negative association with subsequent firm profitability (ROA) during 1993-2006. These results stand in contrast to the prior literature on 10-K narrative disclosures, across disciplines, where such disclosures have been found to convey meaningful information (via positive association) about current and future firm fundamentals. We argue that the unique characteristics of the R&D disclosure environment make it difficult for managers to develop skilled intuitive judgments about the outcome of their firms’ R&D investments, which in turn could adversely affect the accuracy and credibility of these disclosures. The disclosure-type and features of the environment are thus important considerations in this area.