The Effect of Peer Firms' Financial Reporting Tone on Firm Investment: The Moderating Role of Information Disclosure Quality and Industry Competition

Document Type : Research Paper

Authors

1 Professor of Accounting, University of Isfahan, Isfahan, Iran.

2 Assistant Professor of Accounting, University of Isfahan, Isfahan, Iran.

3 M.A Student of Accounting, University of Isfahan, Isfahan, Iran.

Abstract

According to the research literature, the tone of peer reports, as a strategic signal, shapes the company's view of economic and industry conditions and influences the firm's investment decisions. An optimistic peer tone encourages investment, while a pessimistic peer tone reinforces caution and conservatism. On the other hand, it is assumed that high-quality peer disclosure is associated with a stronger spillover effect of peer tone, and with increasing competition in the industry, the spillover effect of peer tone on firm investment may increase. Therefore, this study aims to determine the effect of peer firms' financial reporting tone on firm investment by considering the moderating role of information disclosure quality and industry competition. The sample of this study consists of 130 listed companies on the Tehran Stock Exchange from 2012 to 2023, and the hypotheses were tested using regression models and panel data. The results of the hypothesis test show that the more optimistic the tone of peer firms' financial reports is, the more the firm invests. This means that the optimistic tone of peers creates a safe environment that shows strong market potential and stability to managers. On the other hand, when peers publish high-quality and transparent financial information, the credibility of their optimistic tone increases and strengthens managers' trust. In addition, in competitive industries, managers may interpret the optimistic tone of peers as a signal of increasing competition, leading to more conservative investment decisions.

Keywords

Main Subjects

References

Aflatoni, A. (2015). Statiscal analysis in accounting and financial management by eviews. Tehran: termeh. (In Persian)
Aghamolla, C., & Thakor, R. T. (2022). IPO peer effects. Journal of Financial Economics, 144(1), 206-226.
Ahern, K. R., Duchin, R., & Shumway, T. (2014). Peer effects in risk aversion and trust. The Review of Financial Studies, 27(11), 3213-3240.
Ali-Rind, A., Boubaker, S., & Jarjir, S. L. (2023). Peer effects in financial economics: A literature survey. Research in International Business and Finance, 64(5), 101873.
Badertscher, B., Shroff, N., & White, H. D. (2013). Externalities of public firm presence: Evidence from private firms' investment decisions. Journal of Financial Economics, 109(3), 682-706.
Balakrishnan, R., Qiu, X. Y., & Srinivasan, P. (2010). On the predictive ability of narrative disclosures in annual reports. European Journal of Operational Research, 202(3), 789-801.
Baron, R. M. & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: conceptual, strategic and statistical considerations. Journal of Personality & Social Psychology, 51, 1173-1182.
Beatty, A., Liao, S., & Yu, J. J. (2013). The spillover effect of fraudulent financial reporting on peer firms' investments. Journal of Accounting and Economics, 55(2-3), 183-205.
Berns, J., Bick, P., Flugum, R., & Houston, R. (2022). Do changes in MD&A section tone predict investment behavior? Financial Review, 57(1), 129-153.
Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50(2-3), 296-343.
Bikhchandani, S., Hirshleifer, D., & Welch, I. (1998). Learning from the behavior of others: Conformity, fads, and informational cascades. Journal of Economic Perspectives, 12(3), 151-170.
Blankespoor, E., deHaan, E., & Marinovic, I. (2020). Disclosure processing costs, investors’ information choice, and equity market outcomes: A review. Journal of Accounting and Economics, 70(2-3), 101344.
Bonsalliv, S. B., Bozanic, Z., & Fischer, P. E. (2013). What do management earnings forecasts convey about the macroeconomy? Journal of Accounting Research, 51(2), 225-266.
Campbell, J. L., Lee, H. S. G., Lu, H. M., & Steele, L. B. (2017). Express yourself: why managers' disclosure tone varies across time and what investors learn from it. Contemporary Accounting Research, 37(2), 1140-1171.
Campbell, J. L., Lee, H. S. G., Lu, H. M., & Steele, L. B. (2020). Express yourself: why managers' disclosure tone varies across time and what investors learn from it. Contemporary Accounting Research, 37(2), 1140-1171.
Chang, L., Tan, N., Zhang, X., & Yuan, Y. (2023). Does peer firms’ tone affect corporate investment? Evidence from China. International Review of Financial Analysis, 90, 102741.
Cho, H., & Muslu, V. (2021). How do firms change investments based on MD&A disclosures of peer firms? The Accounting Review, 96(2), 177-204.
Cole, C. J., & Jones, C. L. (2004). The usefulness of MD&A disclosures in the retail industry. Journal of Accounting, Auditing & Finance, 19(4), 361-388.
Davis, A. K., & Tama‐Sweet, I. (2012). Managers’ use of language across alternative disclosure outlets: earnings press releases versus MD&A. Contemporary Accounting Research, 29(3), 804-837.
Davis, A. K., Ge, W., Matsumoto, D., & Zhang, J. L. (2015). The effect of manager-specific optimism on the tone of earnings conference calls. Review of Accounting Studies, 20, 639-673.
Davis, A. K., Piger, J. M., & Sedor, L. M. (2012). Beyond the numbers: Measuring the information content of earnings press release language. Contemporary Accounting Research, 29(3), 845-868.
Deephouse, D. L. (1999). To be different, or to be the same? It’sa question (and theory) of strategic balance. Strategic Management Journal, 20(2), 147-166.
Dougal, C., Parsons, C. A., & Titman, S. (2015). Urban vibrancy and corporate growth. The Journal of Finance, 70(1), 163-210.
Duong, H. K., Ngo, A. D., & McGowan, C. B. (2015). Industry peer effect and the maturity structure of corporate debt. Managerial Finance, 41(7), 714-733.
Durnev, A., & Mangen, C. (2009). Corporate investments: Learning from restatements. Journal of Accounting Research, 47(3), 679-720.
Durnev, A., & Mangen, C. (2020). The spillover effects of MD&A disclosures for real investment: The role of industry competition. Journal of Accounting and Economics, 70(1), 101299.
Ertugrul, M., Lei, J., Qiu, J., & Wan, C. (2016). Annual report readability, tone ambiguity, and the cost of borrowing. Journal of Financial and Quantitative Analysis, 52(2), 811-836.
Farajzadeh Dehkordi, H. (2022). The Impact of Opportunistic Financial Reporting on the Peer Firms’ Operational Efficiency. Journal of Securities and Exchange, 15(59), 199-220. (In Persian)
Feldman, R., Govindaraj, S., Livnat, J., & Segal, B. (2010). Management’s tone change, post earnings announcement drift and accruals. Review of Accounting Studies, 15, 915-953.
Foucault, T., & Fresard, L. (2014). Learning from peers' stock prices and corporate investment. Journal of Financial Economics, 111(3), 554-577.
Gleason, C. A., Jenkins, N. T., & Johnson, W. B. (2008). The contagion effects of accounting restatements. The Accounting Review, 83(1), 83-110.
Grennan, J. (2019). Dividend payments as a response to peer influence. Journal of Financial Economics, 131(3), 549-570.
Hamidian, N. (2023). The effect of earnings co-movement on the probability of earnings manipulation: by considering product market competition. Journal of Accounting Advances, 14(2), 65-97. (In Persian)
Henry, E., & Leone, A. J. (2016). Measuring qualitative information in capital markets research: Comparison of alternative methodologies to measure disclosure tone. The Accounting Review, 91(1), 153-178.
Huang, X., Teoh, S. H., & Zhang, Y. (2014). Tone management. The Accounting Review, 89(3), 1083-1113.
Jackson, A. B., Rountree, B. R., & Sivaramakrishnan, K. (2017). Earnings co-movements and earnings manipulation. Review of Accounting Studies, 22, 1340-1365.
Jackson, A.B., Li. Chao & R. Morris (2020). Earnings Co-movements and the Informativeness of Earnings. The Journal of Accounting Finance and Business Studies, 56(3), 295-319.
Jegadeesh, N., & Wu, D. (2013). Word power: A new approach for content analysis. Journal of Financial Economics, 110(3), 712-729.
John, K., Knyazeva, A., & Knyazeva, D. (2011). Does geography matter? Firm location and corporate payout policy. Journal of Financial Economics, 101(3), 533-551.
Joodaki, M., Khalili, Y., & rahmati, L. (2023). Investigating the moderating effect of leader and young firms in industry on the relationship between peer firms and the firm's investment based on the theories of information deficit and competitiveness. Journal of Accounting Advances, 15(2), 1-32. (In Persian)
Kahneman, D., & Tversky, A. (2013). Prospect theory: An analysis of decision under risk. In Handbook of the fundamentals of financial decision making: Part I (pp. 99-127). World Scientific.
Kang, T., Park, D. H., & Han, I. (2018). Beyond the numbers: The effect of 10-K tone on firms’ performance predictions using text analytics. Telematics and Informatics, 35(2), 370-381.
Kashanipoor, M., Aghaee, M. A., & Mohseni Namaghi, D. (2020). Information Disclosure Tone and Future Performance. Accounting and Auditing Review, 26(4), 570-594. (In Persian)
Kaustia, M., & Knüpfer, S. (2012). Peer performance and stock market entry. Journal of Financial Economics, 104(2), 321-338.
Kordestani, G., & jafarisugh, A. (2022). Peer Companies Performance and Earnings Management: The Effect of Capital Market Pressure. Judgment and Decision Making in Accounting, 1(3), 71-100. (In Persian)
Kothari, S. P., Li, X., & Short, J. E. (2009). The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: A study using content analysis. The Accounting Review, 84(5), 1639-1670.
Kumar, S., Verma, A., & Kumar, C. V. (2019). Does Leverage Influence Firms' Investment Decisions? The Case of BSE 500 Index Companies. SJCC Management Research Review, 9(1), 26-40.
Leary, M. T., & Roberts, M. R. (2014). Do peer firms affect corporate financial policy? The Journal of Finance, 69(1), 139-178.
Li, F. (2010). The information content of forward‐looking statements in corporate filings—A naïve Bayesian machine learning approach. Journal of Accounting Research, 48(5), 1049-1102.
Li, M., Wu, H., Xiao, M., & You, J. (2019). Beyond cheap talk: management's informative tone in corporate disclosures. Accounting & Finance, 59(5), 2905-2959.
Li, S., Wang, D., & Jiang, L. (2025). Can the MD&A tone of listed firms’ annual reports predict their future performance? empirical evidence based on machine learning text analysis. Asia‐Pacific Journal of Financial Studies, 54(1), 54-81.
Lieberman, M. B., & Asaba, S. (2006). Why do firms imitate each other? Academy of Management Review, 31(2), 366-385.
Liu, S., & Wu, D. (2016). Competing by conducting good deeds: The peer effect of corporate social responsibility. Finance Research Letters, 16, 47-54.
Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10‐Ks. The Journal of Finance, 66(1), 35-65.
Loughran, T., McDonald, B., & Yun, H. (2009). A wolf in sheep’s clothing: The use of ethics-related terms in 10-K reports. Journal of Business Ethics, 89, 39-49.
Machokoto, M., Gyimah, D., & Ntim, C. G. (2021). Do peer firms influence innovation? The British Accounting Review, 53(5), 100988.
Mayew, W. J., Sethuraman, M., & Venkatachalam, M. (2014). MD&A disclosure and the firm's ability to continue as a going concern. The Accounting Review, 90(4), 1621-1651.
Mills, K., Morling, S., & Tease, W. (1995). The influence of financial factors on corporate investment. Australian Economic Review, 28(2), 50-64.
Mirali, M., Gholami moghaddam, F., & Hesarzadeh, R. (2018). Investigation of the relationship between financial reporting tone with future corporate performance and market return. Financial Accounting Knowledge, 5(3), 81-98. (In Persian)
Namazi, M. & Namazi, N. R. (2016). Conceptual analysis of moderator and mediator variables in business research. Journal of Procedia Economics & Finance, 36, 540-554.
Park, K., Yang, I., & Yang, T. (2017). The peer-firm effect on firm’s investment decisions. The North American Journal of Economics and Finance, 40(4), 178-199.
Parrino, R. (1997). CEO turnover and outside succession a cross-sectional analysis. Journal of Financial Economics, 46(2), 165-197.
Parsons, C. A., Sulaeman, J., & Titman, S. (2018). The geography of financial misconduct. The Journal of Finance, 73(5), 2087-2137.
Peleh, M., Izadinia, N., & Amiri, H. (2020). The effect of tone in board's activity reports on future performance based on signaling and opportunistic approach. Journal of Value and Behavioral Accounting, 4(8), 1-31. (In Persian)
Qin, D., & Song, H. (2009). Sources of investment inefficiency: The case of fixed-asset investment in China. Journal of Development Economics, 90(1), 94-105.
Rashid, A., & Said, A. F. (2021). Peer effects on investment decisions: Do industry leaders and young firms behave differently? Global Business Review, 25, 1-21.
Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246.
Safarnejad Borojni, A., Chaharmahali, Ali., Pikfelak, J., & Rabiei, M. (2023). Examining the usefulness of the tone of financial reporting in public companies with an emphasis on text mining. Government Accounting, 10(1), 111-124. (In Persian)
Safarzadeh, M. H. , Asnaashari, H. and Panahalipour, A. (2024). Peer effects in corporate disclosure decision. Financial Accounting Research, 16(1), 51-86. (In Persian)
Schmidt, K. M. (1997). Managerial incentives and product market competition. The Review of Economic Studies, 64(2), 191-213.
Seo, H. (2021). Peer effects in corporate disclosure decisions. Journal of Accounting and Economics, 71(1), 101364.
Tetlock, P. C., Saar‐Tsechansky, M., & Macskassy, S. (2008). More than words: Quantifying language to measure firms' fundamentals. The Journal of Finance, 63(3), 1437-1467.
Thaler, R. H., & Johnson, E. J. (1990). Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice. Management Science, 36(6), 643-660.
Toorchi, M., & lari dashtebayaz, M. (2021). Tone of board activity report and bankruptcy prediction. Empirical Research in Accounting, 11(2), 137-157. (In Persian)
Tran, L. T. H. (2022). Reporting quality and financial leverage: Are qualitative characteristics or earnings quality more important? Evidence from an emerging bank-based economy. Research in International Business and Finance, 60, 101578.
Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2016). Accounting theory: conceptual issues in a political and economic environment. Sage Publications.
Zhou, W., Li, Y., Wang, D., Xueqin, D., & Ke, Y. (2024). Management's tone in MD&A disclosure and investment efficiency: Evidence from China. Finance Research Letters, 59, 104767.
Journal of Accounting Advances
Volume 16, Issue 2
February 2024
Pages 169-210

Files

History

  • Receive Date: 04 December 2024
  • Revise Date: 28 March 2025
  • Accept Date: 14 April 2025

Share

How to cite

Statistics