Manipulating the Narrative: Managerial Discretion in the Use of Plain English in Earnings Announcements

Abstract

The SEC published A Plain English Handbook (PEH) with suggestions for making disclosures easier to process. We construct measures of GAAP metric (earnings and revenue) emphasis and readability in earnings announcements (EAs) that reflect the suggestions in the PEH. Using these measures, we find that managers make more favorable and more informative metrics easier to process (i.e., more prominent and readable), but that metric favorability plays a larger role than metric informativeness in explaining disclosure choices, suggesting managerial opportunism. Next, we test whether these relations differ for firms that disclose non-GAAP (NG) earnings versus firms that do not disclose NG earnings. We find that the relations between GAAP earnings favorability/informativeness and GAAP earnings Plain English measures weaken for NG disclosers. The weakened relations suggest that strategic use of Plain English in the discussion of GAAP metrics may substitute for NG earnings disclosures, which are subject to relatively greater regulatory scrutiny. Collectively, our evidence suggests that managers use the PEH tactics intended to clarify value-relevant information to clarify favorable information.