Managing Investors' Perception Through Strategic Word Choices in Financial Narratives

• Date: 01 July 2015
• DOI: http://doi.org/10.1002/jcaf.22064
• Published date: 01 July 2015

57

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22064

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Managing Investors’ Perception

Through Strategic Word Choices in

Financial Narratives

Tracey J. Riley and Benjamin L. Luippold

The financial

statement

reporting pro-

cess includes the

dissemination of

both requisite (i.e.,

financial statement

footnotes) and dis-

cretionary (i.e., press

releases with manage-

ment forecasts, the

President’s Letter,

and Managements’

Discussion and

Analysis [MD&A])

narrative disclosures

to interested parties

(e.g., investors and

regulators). While

the requisite narra-

tive disclosures are

mostly canned and

the word choice is standardized

by industry, the content of the

discretionary narrative disclo-

sures is at the “discretion” of

management. These narratives

are not subject to independent

third‐party assurance (i.e.,

auditing), thus providing an

opportunity for managers to

direct the readers’ attention in

ways that may create a better

impression of company perfor-

mance beyond the content of

the quantitative financial state-

ments. For example, in the dis-

cretionary narrative disclosures,

managers may choose to high-

light favorable performance

measures using

dramatic charts and

graphs, or by altering

font size and color

(Courtis, 2004). Simi-

larly, managers may

selectively include

industry benchmarks

that are below com-

pany performance in

order to draw atten-

tion to areas where

the company excels

over industry aver-

ages (Merkl‐Davies

& Brennan, 2007).

Research suggests

that managing per-

ceptions through

strategies such as

these is an effective

form of impression

management (Merkl‐Davies &

Brennan, 2007).

The research in impression

management through narra-

tives continues to increase,

likely due to the availability

of the data in systems such

as EDGAR1 and text‐mining

tools such as NVivo.2 In the

Corporate managers have been shown to suc-

cessfully use narrative impression management

techniques to influence investors’ perceptions of

company performance. Examples of these tech-

niques include using complex language to dis-

guise bad news, attributing bad news to external

forces, altering the tone of the narratives to sound

more positive, and writing with more verbs than

adjectives to convey the context as concrete. We

provide an overview of the research examining

managers’ impression management techniques

through word choice, along with evidence that

suggests how investors respond. Based on this

information, managers may wish to consider stra-

tegically choosing their language to ensure that

their message is interpreted as intended.

© 2015 Wiley Periodicals, Inc.