Do managers alter the tone of their earnings announcements around stock option grants and exercises?

ix, 69 p. A print copy of this thesis is available through the UO Libraries. Search the library catalog for the location and call number.In this dissertation I investigate whether managers alter the linguistic tone of their earnings announcements to increase the value of their stock options. Empirical research finds evidence that managers use optimistic tone to signal future firm performance. However, prior literature also finds a positive relation between optimistic tone in earnings announcements and short-window abnormal returns. The market reaction to optimistic tone suggests that managers can profit from using pessimistic tone to lower the firm's stock price prior to option grants and optimistic tone to increase the stock price prior to option exercises. I hypothesize that managers adjust the tone of their earnings announcements to increase the value of their stock options. In addition, I hypothesize that managers will alter the tone to increase option payouts when the costs of doing so (proxied by litigation risk) are low and when the financial reporting incentives to do so (proxied by earnings management) are high. I test these predictions using 17,211 firm-quarter observations from 1998-2006. In my tests I regress the tone of the earnings announcement on its known determinants and indicators for a stock option grant or exercise shortly following the announcement. I do not find evidence that managers, on average, alter the tone of earnings announcements prior to option grants or exercises. However, I find that managers decrease optimistic tone prior to option grants when they also record low discretionary accruals, which suggests that altering tone and managing earnings are complementary strategies to move stock price. I also find that managers increase optimistic tone prior to option exercises when litigation risk is low, but decrease optimistic tone prior to option exercises when litigation risk is high. Further analysis indicates the litigation risk results hold only after the Sarbanes-Oxley Act of 2002. Overall, my evidence suggests that managers increase optimistic tone prior to option exercises except when a high threat of litigation constrains such opportunism. When managers do alter tone, the average financial gain is small relative to their total compensation.Committee in charge: Steven Matsunaga, Chairperson, Accounting; Angela Davis, Member, Accounting; David Guenther, Member, Accounting; Jeremy Piger, Outside Member, Economic

Real Earnings Management and the Properties of Analysts\u27 Forecasts

Prior literature generally finds analysts are able to identify and process complex financial information. However, research suggests that in certain settings, analysts struggle to fully incorporate into their forecasts all available information. We examine analysts\u27 forecast properties in the face of a specific type of complex financial information: real earnings management (REM). First, we investigate the relation between measures of REM and analysts\u27 forecast properties. We find REM measures are associated with greater forecast error and dispersion in the following year. However, REM measures, by definition, capture abnormal operating results, and thus include both firms engaging in manipulative REM as well as firms experiencing firm-specific economic shocks. Thus, we conduct cross-sectional tests of analysts\u27 forecasts for firms with and without incentives to manipulate earnings. We find that firms with low incentives to engage in earnings management (i.e., firms most likely experiencing firm-specific economic shocks) generate the strongest positive relation between REM measures and the following year\u27s analysts\u27 forecast properties, suggesting analysts more fully incorporate the earnings implications of firms with high incentives (i.e., firms most likely engaging in manipulative REM). Our results are consistent across numerous REM proxies and indicators of earnings management incentives