Is the Optimism in CEO’s Letters to Shareholders Sincere? Impression Management Versus...

Is the Optimism in CEO’s Letters to Shareholders Sincere?Impression Management Versus Communicative Action Duringthe Economic Crisis

Lorenzo Patelli • Matteo Pedrini

Received: 16 January 2013 / Accepted: 20 July 2013

� Springer Science+Business Media Dordrecht 2013

Abstract In this study, we explore the sincerity of the

rhetorical tone of 664 annual letters to shareholders (CEO

letters). Prior studies adopt Impression Management theory

to predict that firms obfuscate failures and emphasize

successes to unfairly enhance their image and maintain

organizational legitimacy. Yuthas et al. (J Bus Ethics

41:141–157, 2002) challenged such a view, showing that

firms reporting earnings surprises engage in ethical dis-

course with shareholders. We adopt the methodology of

Yuthas et al. (J Bus Ethics 41:141–157, 2002) to explore

the association between firm performance and the rhetori-

cal features of CEO letters in a large sample of Fortune 500

firms in the wake of the global economic crisis. In contrast

to most prior research, we find that optimistic tone is

congruent with both past and future performance. We

conclude that under tough macroeconomic conditions,

incentives to distort public information strategically are

low. Rather, firms tend to engage in communicative action

aimed at dialoguing with shareholders through sincere

disclosure. However, in our conclusions, we warn about the

impact of accounting and rhetorical manipulation on the

congruence between optimistic tone and financial

performance.

Keywords Discourse ethics � Optimism � DICTION �Impression management � Economic crisis

Introduction

Discursive narration is a fundamental manifestation of CEO

leadership (Fairhurst 2007). Prior literature has shown how

language is used by CEOs to manage reputation and build

organizational identity (e.g., Heracleous and Barrett 2001;

Weick et al. 2005; Kuhn 2008; Den Hartog and Verburg

1997). In particular, being a periodic, widely read, written,

signed, and public representation of a firm’s goals, actions,

and results, annual letters to shareholders (hereafter, CEO

letters) are an important element of a CEO’s discursive

narration (Courtis 2004). However, most prior literature has

neglected the ethical dimension of the discourse in CEO

letters. This is particularly concerning because there is ample

empirical evidence showing that investors use explanations

and interpretations presented in CEO letters to assess quality

of earnings and make investment decisions (e.g., Abraham-

son and Amir 1996; Henry 2008).

This paper offers an initial attempt to explore empiri-

cally the adherence of the rhetorical features of CEO letters

to principles of discourse ethics. We focus on the sincerity

principle which, according to Yuthas et al. (2002), could be

considered the most important principle of discourse ethics

because ‘‘different from factual correctness, adhering to

this principle requires that rhetors do more than simply

present correct information, but that they be authentic in

their representations so that other participants can develop

an understanding of their views’’ (p. 151). Following Yu-

thas et al. (2002), our investigation of the sincerity prin-

ciple is performed by contrasting Impression Management

and Communicative Action theory.

L. Patelli (&)

School of Accountancy, Daniels College of Business, University

of Denver, 2101 S University Blvd., Suite #360, Denver,

CO 80208, USA

e-mail: [email protected]

M. Pedrini

ALTIS-Postgraduate School Business and Society, Universita

Cattolica del Sacro Cuore, Via San Vittore 18, 20123 Milan,

Italy

e-mail: [email protected]

123

J Bus Ethics

DOI 10.1007/s10551-013-1855-3

Management and accounting literatures have usually

considered CEO letters to be mechanisms of impression

management (Hooghiemstra 2000). Impression manage-

ment is based on the obfuscation hypothesis, according to

which managers obfuscate failures and emphasize suc-

cesses (Clatworthy and Jones 2003). This means that the

presentation of accounting information in CEO letters is

deemed to be distorted in a systematic way to influence

share price (Bowen et al. 2005). Such a distortion can be

obtained through poor readability and manipulation of

rhetorical features (Merkl-Davies and Brennan 2007).

Yuthas et al. (2002) challenge the obfuscation hypothesis

of Impression Management theory, which views communi-

cation in CEO letters as a strategic action intended to exer-

cise influence. They argue that management narrative

disclosure could actually be a form of communicative action

intended to facilitate mutual understanding and promote a

common vision. Based on the conceptualization of Haber-

mas (1984, 1987) and Forester (1985), Yuthas et al. (2002)

provide partial evidence of communicative action in the

management discussion and analysis (MD&A) section of

corporate annual reports. In particular, the authors note that

firms might not be willing to engage persistently in impres-

sion management due to the need to maintain organizational

legitimacy. They offer anecdotal evidence that rhetorical

features of CEO letters of firms releasing earnings surprises

meet principles of discourse ethics, namely comprehensi-

bility, truth, sincerity, and legitimacy.

In this paper, we empirically explore the validity of the

arguments presented by Yuthas et al. (2002) on a large

sample of CEO letters. Moreover, we extend the reasoning

by Yuthas et al. (2002) supporting the view of CEO letters

as instruments of communicative action. Finally, we dis-

cuss implications for future empirical research on discourse

ethics.

Our findings provide empirical evidence of a significant

link between firm performance and optimistic tone. In

addition to replicating the univariate analyses proposed by

Yuthas et al. (2002) comparing rhetorical tone of CEO

letters across different performance quartiles, we utilize

regression analyses to examine the congruence between

performance and rhetorical tone of CEO letters. Based on

664 CEO letters of large U.S. publicly traded firms from

fiscal years 2008 and 2009 and controlling for several

factors including firm size, number of shareholders, and

growth opportunities, we show that optimistic tone is

strongly and positively associated with both past and future

accounting returns, suggesting the presence of sincerity in

CEO letters. We also report a non-significant association

between future performance and readability indicators after

controlling for past performance, indicating a complex

relationship between firm performance and comprehensi-

bility of CEO letters. Finally, we find an association

between engaging language of CEO letters and firm

performance.

Although the overall empirical evidence is mixed, many

prior studies examining the association between tone and

performance typically find results opposite to our findings

(Merkl-Davies and Brennan 2007). We argue that three

fundamental factors have been neglected in prior research.

First, as emphasized by Yuthas et al. (2002), organizational

legitimacy plays an important role in affecting the tone of

discretionary narrative disclosure. Persistent incongruence

between rhetorical tone and firm performance threatens

CEO reputation, and this is inconsistent with self-serving

behavior stressed by impression management studies.

Second, our empirical evidence underlines the relevance of

the context in which rhetorical manipulation occurs. Spe-

cifically, tough macroeconomic conditions characterized

by high uncertainty and unfavorable prospects can reduce

the incentives to impress shareholders and increase costs.

Finally, prior research does not generally adopt a com-

prehensive measurement of rhetorical features, failing to

control for competing rhetorical manipulation strategies. In

addition to highlighting limitations of prior research, we

discuss two main issues for future research on ethics of

corporate discourse, namely the intentionality of discourse

ethics and the impact of earnings management.

The paper is structured as follows. In the following

section, we present the theoretical background of our study.

Next, we describe the research methodology and results of

both univariate analyses adapted from Yuthas et al. (2002)

and a multivariate analysis based on a regression model.

The final sections discuss our findings and implications for

future research.

Theoretical Background

CEO letters fulfill fundamental strategic and accountability

functions (Amernic et al. 2010). They are discretionary

disclosure vehicles communicating various significant

aspects of organizations and their leaders. Prior studies

provide ample evidence on the effect of discretionary

narrative disclosure on investment decisions (e.g., Bagin-

ski, et al. 2004; Hutton et al. 2003; Matsumoto and Chen

2006; Henry 2008). The steady increase in the length of

corporate annual reports shown by Li (2008) highlights the

importance of CEO letters in introducing readers to a

complex document.

However, several prior studies argue that CEO letters do

not contain a neutral description of performance results and

are construed as forms of impression management through

which CEOs purposively influence communication rather

than seek mutual understanding. Schlenker (1980) defines

impression management as, ‘‘the conscious or unconscious

attempt to control images that are projected in real or

L. Patelli, M. Pedrini

123

imaginary social interactions’’ (p. 51). This concept has

been used in a myriad of business studies to investigate

how firms maintain endorsement and support from stake-

holders (Elsbach and Sutton 1992). According to Clat-

worthy and Jones (2006), CEO letters offer examples of

impression management insofar as their textual character-

istics reflect the self-serving goals of managers rather than

the actual performance results being communicated. When

they engage in impression management, CEOs control the

information released in the CEO letters to influence

shareholders’ judgment about managerial performance.

Impression management is consistent with the obfuscation

hypothesis, according to which managers obfuscate failures

and emphasize successes (Courtis 1998). In their summary

of the literature about disclosure strategies in corporate

narratives, Merkl-Davies and Brennan (2007) report that

prior studies have adopted agency (e.g., Abrahamson and

Amir 1996), signaling (e.g., Smith and Taffler 1992),

legitimacy (e.g., Ogden and Clarke 2005), stakeholder

(e.g., Hooghiemstra 2000), and institutional theory (e.g.,

Bansal and Clelland 2004) as theoretical foundations of the

obfuscation hypothesis. Strikingly, these different theories

converge in predicting that managers will engage in

impression management by tactically manipulating dis-

cretionary disclosure and instilling a favorable assessment

of performance. By reviewing prior empirical studies,

Merkl-Davies and Brennan (2007) find that obfuscation of

performance results is achieved through various conceal-

ment strategies that manipulate ease of reading, rhetorical

tone, thematic content, visual and structural effects, per-

formance comparison, and the choice of performance

metrics. For example, early studies report that the read-

ability of corporate narratives is negatively associated with

firm performance, suggesting the intentional use of com-

plex lexicon in order to obfuscate poor performance (e.g.,

Courtis 1986). Similarly, studies in accounting show how

visual and structural effects may be systematically dis-

torted to obscure real trends and depict more favorable

situations (e.g., Steinbart 1989; Beattie and Jones 1992;

Courtis 1997; Frownfelter-Lohrke and Fulkerson 2001).

Yuthas et al. (2002) challenge the view of corporate

narratives based on impression management, which domi-

nates the extant literature, and propose a different view based

on communicative action. In fact, prior empirical studies do

not provide unequivocal results for the test of the obfuscation

hypothesis (Aerts 2005; Merkl-Davies and Brennan 2007).

The Theory of Communicative Action by Habermas (1984,

1987) posits that actors in society rely on reasoned arguments

to obtain mutual understanding and cooperation. Commu-

nicative action is opposed to strategic action, whereby actors

in society are expected to engage in communication driven

by self-serving behavior. While through the lens of impres-

sion management, voluntary narrative disclosure is seen as a

strategic action undertaken to influence interpretations of

performance results, it is seen as a communicative action

undertaken to favor mutual understanding through the lens of

communicative action (Yuthas et al. 2002). From the Theory

of Communicative Action, Habermas (1984, 1987) gener-

ates the characteristics of discourse ethics based on four

ethical principles: comprehensibility, truth, sincerity, and

legitimacy (Forester 1985). Weber (2010) finds that CEO

language reveals elements of moral reasoning. Provis (2010)

discusses the ethics of impression management and con-

cludes that, as long as it is deceptive, impression manage-

ment can lead to harmful decisions based on the false

representation of performance. Conversely, Yuthas et al.

(2002) claim that communicative action leads to sincere

interpretations consistent with actual financial results and

performance forecasts. Therefore, Yuthas et al. (2002) con-

clude that impression management is inconsistent with dis-

course ethics, whereas communicative action supports an

ethical approach to corporate narratives.

Following Yuthas et al. (2002), we argue that prior

research has neglected fundamental factors underlying the

tension between the obfuscation hypothesis of impression

management and the Theory of Communicative Action.

CEO letters are routine disclosure vehicles, and a persistent

false representation of performance is economically unsus-

tainable because it would jeopardize organizational legiti-

macy. Indeed, Segars and Kogut (2001) provide empirical

evidence showing a positive association between credibility

(i.e., accurate accounting of performance results) of CEO

letters and firm performance. Merkl-Davies and Brennan

(2007) invoke more research based on non-routine disclo-

sure vehicles (e.g., IPO prospectus). However, CEOs are

more likely to engage in impression management with non-

routine vehicles because of the extraordinary nature of the

information and the difficulty for investors to monitor sin-

cerity given the non-recurring nature of the disclosure.

Therefore, more research on non-routine vehicles would lead

to biased conclusions in favor of impression management in

narrative financial disclosures. Conversely, routine disclo-

sure vehicles are more likely to reveal typical traits of

leadership, including engagement in discourse ethics and

communicative action (Amernic et al. 2010). Geppert and

Lawrence (2008) show that CEOs employ CEO letters as a

reputation management tool and firms with a high corporate

reputation tend to communicate in a simpler way and with a

more realistic rhetorical tone. In addition to corporate rep-

utation, individual reputation is at stake in CEO letters.

Persistent engagement in self-serving behavior through

routine discretionary financial disclosure inconsistent with

firm performance would lead CEOs to lose reputation with

significant consequences for their own personal wealth. On

this point, Amernic and Craig (2006) clarify that it is erro-

neous to assume CEOs are not the actual authors of CEO

Is Optimism Sincere?

123

letters. Whilst it is plausible for them to be crafted by pro-

fessional writers, CEO letters are perceived by stakeholders

as manifestations of CEOs’ leadership and CEOs would

hardly delegate to others any communication with such

potentially important consequences for individual reputation

(Amernic et al. 2010). Furthermore, we argue that the costs

of engaging in impression management are likely to be

higher when macroeconomic conditions are tough. Institu-

tional theory highlights the effect of social pressure on dis-

closure strategies (DiMaggio and Powell 1991). CEOs are

expected to conform to institutional norms. Economic

downturns exacerbate social pressure to obtain understand-

ing and transparency as happened, for instance, with the

increased scrutiny and subsequent regulation surrounding

the banking industry after the liquidity crisis in 2008.

Opportunistic deviations from the norm to impress and

manipulate perceptions could be extremely costly during

economic downturns for both organizational legitimacy and

CEO reputation. Moreover, according to research in psy-

chology, reactions to voluntary disclosure depend on

expectations (e.g., Mellers et al. 1997). Unexpected negative

news can generate extremely unfavorable reactions, leading

managers to engage in impression management. During a

global economic downturn, negative results are commonly

expected, reducing incentives for impression management.

Finally, D’Aveni and MacMillan (1990) make a distinction

between CEO letters of firms that are capable of successfully

overcoming difficult economic conditions and those of

failing firms. The former emphasize internal operations; the

latter distract readers from actual performance by empha-

sizing factors connected to the external environment. This

distinction suggests impression management could be more

likely in firms that are performing poorly, whereas com-

municative action is more likely to be associated with good

performance.

Overall, the discussion above identifies organizational

legitimacy, individual reputation, macroeconomic condi-

tions, and firm financial situation as fundamental factors

that affect the congruence between CEO rhetorical tone

and organizational performance. By testing the empirical

association between optimistic tone and accounting returns

in a large sample of CEO letters in the wake of the global

economic crisis, our objective is to explore the congruence

between rhetorical tone and firm performance in order to

gage the sincerity of CEO letters.

Methodology

Sample

Our sample comprises CEO letters of firms listed in the

Fortune 500 ranking. Focusing on large U.S. publicly

traded firms allowed us to build a large sample, as CEO

letters are not mandatory and voluntary disclosure has been

found to be richer in large firms (e.g., Ahmed and Courtis

1999). We consider CEO letters published in annual reports

of fiscal year 2008 and 2009. The global economic crisis

erupted with the collapse of Lehman Brothers Holdings,

Inc. in September of 2008 as a result of the burst of the

U.S. real estate bubble and spread quickly around the world

through the financial system, with dramatic consequences

for the global economy. From 2008 to 2010 (i.e., the period

for which we collected financial data from COMPUSTAT

of firms included in our sample), CEOs faced a sudden

turnover of performance results surrounded by uncertainty

in both causes and effects of the crisis. Under such con-

ditions of uncertainty and negative outlook, the choice of

engaging in impression management by obfuscating actual

performance results or communicative action by main-

taining discourse ethics bear significant consequences for

CEO credibility and organizational legitimacy.

From the initial list of firms in the 2010 Fortune 500

ranking, the full sample is reduced to 332 firms due to

research design choices and other data collection issues.

We required CEO letters to be an integral part of the annual

report. Therefore, we excluded 103 firms because CEO

letters were only available online or not included in the

annual reports. In order to obtain a matched sample

between 2008 and 2009, 49 firms were excluded either

because they were not listed on the 2009 Fortune 500 or

due to missing data in COMPUSTAT. Finally, 16 firms

were excluded because of outlier values for rhetorical

features, performance, or control variables. We performed

various tests to control for the representativeness of our

sample. Results (non-tabulated) of comparison of means

show that the overall initial population of Fortune 500

firms does not significantly differ from our final sample.

Moreover, we ran our analyses for an unmatched sample

(i.e., including firms listed just in 2008 or 2009) and by

replacing missing values with sample averages; neither

change affected our empirical results. Table 1 shows the

industry composition of our final sample, and Table 2

reports descriptive statistics of our empirical variables by

industry. More than 15 industries are represented with a

noteworthy concentration in the financial services and

information and communication technology industries.

ANOVA statistics in Table 2 indicate that our variables are

significantly different across industries, and in the follow-

ing analyses, we scale each variable by industry median for

this reason.

Textual Analysis Program

Most prior studies rely on syntactic analysis and focus on

merely two features of the lexicon of the corporate


123

narratives, namely, text readability and frequency of posi-

tive terms. In line with impression management, reading

difficulty and optimistic tone are expected to be forms of

text manipulation employed to obfuscate bad results and

emphasize positive results (Courtis 1998; Cho et al. 2010).

Readability has been widely investigated by prior research,

including its relationship with firm performance (e.g.,

Subramanian et al. 1993), analysts following (Lehavy et al.

2011), liquidity (Smith and Taffler 1992), financial press

coverage (Courtis 1998), and corporate risk (Courtis 1986).

However, prior empirical research does not offer an

unequivocal result on the association between readability

and performance. Moreover, Merkl-Davies and Brennan

(2007) point out that prior studies failed to explain whether

poor readability is determined by impression management

or unintentional lexical deficiencies. Similarly, studies

examining the association between positive tone and per-

formance give mixed results (Merkl-Davies and Brennan

2007). The lack of comprehensive measurement of rhe-

torical features reduces the validity of prior studies that

emphasize the use of tone for impression management.

To overcome limitations of prior research, this study is

based on a thematic analysis using DICTION 5.0, a Win-

dows-based language-analysis program that uses a series of

dictionaries to search a passage for five master variables:

Certainty, Optimism, Activity, Realism, and Commonality.

By relying on 10,000 search words assigned to 35 linguistic

categories, DICTION supports analyses oriented toward

not only the form, but also the meaning of words (Sydserff

and Weetman 2002). The reliance on multiple linguistic

dictionaries controls for the synonymy issue that affects

syntactic analyses, including those based on readability

scores (Henry 2008). The synonymy issue refers to the

inability of capturing similarity of terms. Moreover, dic-

tionaries are consistently rooted in semantic theory and

avoid inter-rater reliability problems caused by the use of

subjective coding (Short and Palmer 2008; Davis et al.

2012). The theoretical and methodological rigor of DIC-

TION facilitates its application on large samples and

comparability across studies.

DICTION is designed to generate five master variables

whose values are determined according to a variable

structure proposed by Hart (2000) and inspired by seminal

semantic studies (e.g., Johnson 1946; Osgood et al. 1957).

Certainty indicates resoluteness, inflexibility, complete-

ness, and a tendency to speak ex cathedra. Optimism refers

to the words endorsing some person, group, concept, or

event or highlighting their positive entailments. Activity is

the variable capturing movement, change, the implemen-

tation of idea, and the avoidance of inertia; Realism focuses

on language describing tangible, immediate, and recog-

nizable matters that affect everyday life. Commonality

measures the emphasis on the agreed-upon values of a

group and the rejection of idiosyncratic modes of

engagement.

Prior studies conducted in different fields (for example,

Bligh et al. (2004) in organizational sciences and Ober

et al. (1999) in business communication) indicate that

DICTION possesses robust empirical validity (Alexa and

Zuell 2000; Short and Palmer 2008). In particular, its

automated procedure based on rigorous theoretical foun-

dations ensures objectivity and measurement validity (e.g.,

Davis et al. 2012). DICTION is appropriate for the analysis

of CEO letters from U.S. firms since its dictionaries were

constructed from the examination of U.S. texts. Hart (2001)

shows results of a large multicollinearity test performed on

the five master variables, indicating the statistical inde-

pendence of each variable from one another and, hence,

strong discriminant validity and reliability.

DICTION has also been used in prior empirical research

dealing with corporate narratives. Two prior studies (i.e.,

Sydserff and Weetman 2002; Yuthas et al. 2002) use the

complete set of variables provided by DICTION. However,

both Sydserff and Weetman (2002) and Yuthas et al.

(2002) measure all five master variables based on very

small corpora purely for illustrative methodological pur-

poses. Specifically, Sydserff and Weetman (2002) used the

Chairman’s statement and manager’s report of 26 small

UK Investment trusts, whereas Yuthas et al. (2002) used

the CEO letters and MD&A section in the annual report of

seven pairs of U.S. publicly traded firms reporting a very

bad or very good earnings surprise. Cho et al. (2010)

examine the environmental disclosure section in the annual

Table 1 Industry composition of sample

Industries Firms

Aerospace and defense 3.6

Apparel 1.2

Automotive 4.8

Chemical and pharmaceutical 7.3

Energy, oil, and gas 6.9

Engineering and construction 6.6

Financial and insurance services 15.4

Food and beverage 6.3

Health care 5.7

Home equipment 3.0

Industrial machinery 3.6

Information communication technology 11.5

Media and entertainment 3.3

Retailers 8.2

Tobacco 0.9

Utilities 6.3

Wholesalers 5.1


123

Table 2 Differences in the rhetorical tone and performance among industries

Industries Variables

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Aerospace and defense

M 0.06 0.08 0.02 2.72 10.19 0.33 27,268 11.10 0.08 1,494 49.18 54.51 44.96 45.76 50.97

SD 0.03 0.05 0.01 6.75 0.91 0.13 19,92 0.85 0.28 718 5.65 2.09 2.48 2.50 1.87

Apparel

M 0.08 0.06 0.03 1.65 7.81 0.28 9,341 10.32 0.25 1,337 47.70 54.69 45.70 46.55 51.00

SD 0.04 0.12 0.01 0.94 1.64 0.16 5,99 0.37 0.46 377 7.09 1.97 2.32 1.77 1.26

Automotive

M 0.01 0.01 0.07 -0.91 8.96 0.13 15,892 10.23 0.44 1,197 50.59 52.76 46.54 45.33 50.19

SD 0.09 0.09 0.13 15.49 2.02 0.13 29 0.84 0.50 553 2.28 1.89 2.95 2.11 1.56

Chemical and pharma

M 0.08 0.08 0.04 3.60 9.83 0.26 17,051 10.03 0.08 1,727 48.88 53.97 45.35 45.52 50.52

SD 0.08 0.07 0.03 3.12 2.03 0.15 16,397 1.00 0.27 1,055 4.81 2.22 3.20 2.15 1.52

Energy, oil, and gas

M 0.03 0.08 0.12 1.56 9.84 0.05 45,774 9.12 0.22 1,439 49.34 53.13 45.31 45.08 51.70

SD 0.05 0.08 0.09 0.86 2.10 0.07 86,717 1.21 0.42 793 1.73 1.97 2.80 1.86 1.74

Engineering and construction

M 0.02 0.05 0.05 2.11 9.15 0.18 13,667 10.11 0.18 1,428 49.45 53.61 46.03 45.96 50.93

SD 0.04 0.05 0.04 3.08 2.73 0.13 11,448 1.15 0.39 687 3.99 2.26 2.57 2.21 1.93

Financial and insurance

M 0.02 0.02 0.00 2.10 9.47 0.10 26,982 9.98 0.28 2,288 48.18 52.84 46.10 46.47 51.15

SD 0.04 0.05 0.01 2.23 2.62 0.16 37,659 1.38 0.45 2,047 3.20 1.98 2.93 2.16 1.73

Food and beverage

M 0.08 0.05 0.05 4.82 10.31 0.21 41,761 11.38 0.15 1,492 49.68 53.80 45.68 46.69 51.03

SD 0.05 0.09 0.03 4.83 1.68 0.18 86,932 1.28 0.36 1,204 2.61 2.60 4.07 2.71 2.35

Health care

M 0.07 0.06 0.03 2.67 8.65 0.35 19,837 10.11 0.08 1,551 49.74 55.63 46.05 46.04 51.29

SD 0.04 0.05 0.02 2.39 2.39 0.22 22,917 0.76 0.27 550 1.76 2.48 2.66 2.01 2.01

Home equipment

M 0.06 0.05 0.03 0.12 9.91 0.40 15,518 10.25 0.20 1,607 48.73 54.62 45.01 44.85 49.87

SD 0.04 0.05 0.02 6.60 1.99 0.16 23,001 0.80 0.41 780 7.65 2.59 3.95 3.19 2.53

Industry machinery

M 0.05 0.07 0.03 3.30 9.08 0.27 12,004 10.37 0.08 1,743 49.03 53.83 45.59 45.62 50.55

SD 0.04 0.03 0.01 3.92 1.47 0.21 10,777 0.63 0.27 623 4.43 1.56 4.57 1.79 1.43

ICT

M 0.07 0.07 0.05 1.59 10.06 0.24 24,79 10.55 0.13 1,591 50.02 53.61 45.37 45.63 51.38

SD 0.06 0.10 0.04 13.06 2.09 0.13 32,935 0.99 0.33 746 3.78 2.10 3.50 2.76 2.33

Media and entertainment

M 0.03 0.04 0.03 2.75 9.45 0.33 14,431 10.46 0.38 1,795 49.31 53.87 45.54 45.73 50.68

SD 0.04 0.06 0.05 3.35 2.04 0.18 13,126 1.74 0.49 846 1.51 1.86 3.15 3.43 1.63

Retailers

M 0.06 0.06 0.06 4.14 8.36 0.13 18,719 11.00 0.16 1,391 48.99 53.92 45.37 46.25 51.38

SD 0.08 0.08 0.03 9.93 1.90 0.15 23,802 0.77 0.37 665 2.02 2.74 3.59 2.84 2.68

Tobacco

M 0.12 0.12 0.01 8.89 10.90 0.42 16,797 9.76 0.0 1,274 50.33 54.78 45.94 43.71 51.00

SD 0.06 0.08 0.01 5.44 0.87 0.19 7,501 1.16 0.0 510 1.62 1.97 2.13 1.40 1.12

Utilities

M 0.02 0.02 0.06 1.56 10.37 0.09 9,019 9.54 0.13 1,705 47.49 53.26 45.28 46.42 51.91

SD 0.03 0.03 0.02 1.44 1.20 0.13 3,659 1.05 0.34 1,049 7.66 1.84 3.07 2.12 1.52

Wholesalers

M 0.05 0.06 0.02 1.73 7.74 0.17 25,897 9.32 0.08 1,46 49.57 53.58 45.90 45.66 51.25

SD 0.03 0.05 0.01 1.15 1.94 0.11 31,332 0.88 0.28 631 1.49 1.99 2.87 1.49 2.07


123

report of 190 firms and limit their analysis to Optimism and

Certainty. Finally, Davis et al. (2012) and Henry (2008)

calculated a modified version of Optimism based on a

corpus comprising earnings releases of U.S. firms. The

partial use of DICTION indicates a lack of a comprehen-

sive measurement of rhetorical features in prior research.

Moreover, it raises concerns about the validity of prior

results regarding optimistic tone, given the omission of

competing rhetorical features that could be used as alter-

native rhetorical manipulation strategies.

Data Analysis

We examine the association between rhetorical tone and

firm performance in two parts. The first part of the

analysis presents univariate statistics comparing the tone

of CEO letters from four groups of firms divided

according to performance results. We replicate the

methodology used by Yuthas et al. (2002) in order to

favor the interpretation of our findings in light of the

operationalization of discourse ethics proposed by Yuthas

et al. (2002). The second part provides results of a mul-

tivariate analysis where future performance is regressed

on the optimistic tone of CEO letters, controlling for four

other rhetorical features measured by DICTION and a

proxy for readability. Given the small sample size, Yuthas

et al. (2002) could not perform statistically significant

regression analyses.

Specifically, we use the DICTION master variable

Optimism, which measures the frequency of positive con-

cepts in a text (Hart 2000), to measure rhetorical tone.

Several prior studies associate Optimism to impression

management, particularly through emphasis on positive

news and disregarding of negative news (e.g., Cho et al.

2010; Sydserff and Weetman 2002). According to the

sincerity principle of discourse ethics (Yuthas et al. 2002),

Optimism must be positively related to firm performance,

meaning that sincerity is observed if positive tone is sup-

ported by good performance. Praise, Satisfaction, and

Inspiration are features increasing Optimism, whereas

Blame, Hardship, and Denial are features decreasing

Optimism (Hart 2000).

To measure firm performance, we collected financial

data from COMPUSTAT for four fiscal years (i.e., 2007,

2008, 2009, and 2010). Investors and analysts pay con-

siderable attention to the growth of revenue and profit to

make investment decisions and recommendations. There-

fore, we computed the 1-year percentage change in annual

revenue and profit relative to both the previous year and the

following year. The variables ROA and FROA measure past

and future return on assets, respectively. Return on assets is

a summary measure capturing the overall operating

profitability.

Findings

Univariate Analysis

The univariate analysis adapted from Yuthas et al. (2002)

enables us to explore the association between Optimism

and firm performance descriptively. Furthermore, the

analysis enriches our discussion by providing detailed

findings on the lexical elements of rhetorical tone. Fol-

lowing Yuthas et al. (2002), we split the sample based on

firm performance (i.e., past and future revenue and profit

growth) and examine the average score of Optimism. In

Tables 3, 4, and 5, firms are grouped into HIGHEST,

which includes firms reporting performance in the highest

quartile, and LOWEST, which includes firms reporting

performance in the lowest quartile. We compare scores of

HIGHEST and LOWEST to each other in Table 3, to the

average of the sample (including all quartiles) in Table 4,

and to normative scores, which are provided by DICTION

and are based on corporate reports of a sample of Fortune

500 firms in Table 5. In Tables 3 and 4, the significance of

the differences based on sample data is measured through

t statistics, which could not be obtained by Yuthas et al.

(2002) due to small sample size. In Table 5, the signifi-

cance of the differences based on DICTION normative

scores is assessed using the criteria proposed by Yuthas

et al. (2002). Specifically, differences are considered sig-

nificant when the value of the master variable Optimism

deviates at least by 2 % from the DICTION normative

Table 2 continued

Industries Variables

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

ANOVA 7.67** 4.61** 18.05** 1.71* 5.19** 16.94** 2.62** 12.45** 2.98** 3.34** 1.68* 4.44** 0.67** 2.2** 2.37**

01 Future return on assets, 02 Return on assets prior year, 03 Capital expenditures to assets ratio, 04 Price to book ratio, 05 Number of shareholders, 06 Intangible

assets to assets ratio, 07 Revenue, 08 No. of employees, 09 Loss, 10 Text length, 11 Activity, 12 Optimism, 13 Certainty, 14 Realism, 15 Commonality

N. obs.: 664; * p \ 0.05; ** p \ 0.01


123

Table 3 Comparison of

rhetorical tone between lowest

and highest performance

* p \ 0.05; ** p \ 0.01

Variables Lowest Highest Comparison

Highest vs lowest T stat.

Panel A: past revenue growth

Optimism 53.1 54.0 1.8 4.48**

Praise 6.2 7.1 13.9 3.53**

Satisfaction 3.5 4.5 26.5 3.27**

Inspiration 7.6 8.7 13.5 2.47*

Blame 1.0 0.8 -25.8 -3.24**

Hardship 1.9 2.8 45.1 1.04

Denial 1.3 1.6 26.6 0.83

Total words 1,445.4 1,866.8 29.2 2.43*

Total characters 6,387.3 9,084.2 42.2 2.46*

Different words 733.0 943.9 28.8 2.69**

Average words size 5,202.4 5,134.7 -1.3 -2.21*

Panel B: past profit growth

Optimism 53.1 54.0 1.7 3.42**

Praise 6.6 7.1 7.2 1.45

Satisfaction 4.0 4.5 12.8 0.48

Inspiration 7.0 8.7 24.9 4.26**

Blame 1.0 0.7 -25.3 -2.20*

Hardship 2.6 1.9 -26.0 -1.32

Denial 1.4 1.3 -10.6 0.35

Total words 1,480.9 1,769.7 19.5 1.93

Total characters 6,683.4 8,552.8 28.0 1.78

Different words 750.3 916.6 22.2 1.97*

Average words size 5,182.6 5,118.7 -1.2 -0.71

Panel C: future revenue growth

Optimism 53.2 54.0 1.5 3.85**

Praise 6.9 6.7 -3.5 0.54

Satisfaction 3.5 4.1 18.8 4.15**

Inspiration 7.2 8.5 18.1 3.57**

Blame 0.9 0.9 3.2 -2.24*

Hardship 2.1 2.5 17.0 0.32

Denial 1.3 1.4 2.8 1.03

Total words 1,480.9 1,769.7 19.5 1.93


Different words 750.3 916.6 22.2 1.97*


Panel D: future profit growth

Optimism 52.9 54.0 2.1 5.38**

Praise 6.5 7.2 11.8 1.98*

Satisfaction 3.6 4.3 20.3 3.29**

Inspiration 6.9 9.0 30.0 5.13**

Blame 0.7 1.0 39.7 -2.93**

Hardship 2.4 2.3 -4.7 -1.19

Denial 1.4 1.4 4.6 0.58

Total words 1,503.3 1,774.7 18.1 1.77


Different words 744.1 906.0 21.8 2.59**



123

Table 4 Comparison of rhetorical tone between lowest, highest and sample average performance

Variables Lowest Highest Sample

average

Comparison

Lowest vs

sample average

Highest vs

sample average

F Stat.


Optimism 53.1 54.0 53.5 -0.9 0.9 10.19**

Praise 6.2 7.1 7.3 -14.9 -3.1 6.01**

Satisfaction 3.5 4.5 4.4 -20.8 0.2 5.76**

Inspiration 7.6 8.7 7.8 -1.8 11.4 4.21*

Blame 1.0 0.8 0.7 44.9 7.5 5.87**

Hardship 1.9 2.8 2.2 -11.4 28.5 5.38**

Denial 1.3 1.6 1.4 -8.5 15.9 2.17

Total words 1,445.4 1,866.8 1,639.7 -11.8 13.9 5.84**

Total characters 6,387.3 9,084.2 7,662.5 -16.6 18.6 5.98**

Different words 733.0 943.9 845.3 -13.2 11.6 5.39**

Average words size 5,202.4 5,134.7 5,135.2 1.0 0.0 2.71


Optimism 53.1 54.0 53.8 -1.3 0.4 7.84**

Praise 6.6 7.1 7.1 -6.4 0.3 1.18

Satisfaction 4.0 4.5 4.2 -3.3 9.1 1.29

Inspiration 7.0 8.7 8.3 -16.0 4.9 9.26**

Blame 1.0 0.7 0.8 26.7 -5.3 3.01*

Hardship 2.6 1.9 2.2 15.1 -14.8 2.97

Denial 1.4 1.3 1.5 -3.5 -13.7 1.00

Total words 1,480.9 1,769.7 1,668.6 -11.2 6.1 2.83

Total characters 6,683.4 8,552.8 7,774.4 -14.0 10.0 2.89

Different words 750.3 916.6 849.7 -11.7 7.9 3.38*

Average words size 5,181.9 5,118.2 5,164.2 0.4 -0.9 2.14


Optimism 53.2 54.0 53.5 -0.6 0.9 7.56**

Praise 6.9 6.7 7.1 -2.4 -5.8 0.86

Satisfaction 3.5 4.1 4.6 -25.2 -11.2 8.49**

Inspiration 7.2 8.5 8.5 -15.5 -0.3 5.91**

Blame 0.9 0.9 0.7 28.7 32.8 3.90*

Hardship 2.1 2.5 2.2 -2.6 13.9 1.08

Denial 1.3 1.4 1.5 -9.9 -7.4 0.63

Total words 1,480.9 1,769.7 1,668.6 -11.2 6.1 2.83


Different words 750.3 916.6 849.7 -11.7 7.9 3.38*



Optimism 52.9 54.0 53.7 -1.4 0.6 13.68**

Praise 6.5 7.2 7.1 -8.4 2.4 2.53

Satisfaction 3.6 4.3 4.5 -20.2 -4.0 5.07**

Inspiration 6.9 9.0 7.9 -12.5 13.8 13.92**

Blame 0.7 1.0 0.9 -19.3 12.7 4.59*

Hardship 2.4 2.3 2.2 10.3 5.1 0.45

Denial 1.4 1.4 1.4 -5.9 -1.7 0.18

Total words 1,503.3 1,774.7 1,656.8 -9.3 7.1 2.47


Different words 744.1 906.0 859.0 -13.4 5.5 3.51**


* p \ 0.05; ** p \ 0.01


123

scores. For the rest of the variables, there must be at least a

20 % deviation from the DICTION normative scores.1

Results in Tables 3, 4, and 5 report a significantly

positive association between Optimism and measures of

firm performance. The statistical association is positive for

both past and future performance. CEO letters of firms in

the HIGHEST quartile have a much more positive tone

than those in the LOWEST. These results strongly support

the congruence between rhetorical tone and performance in

line with communicative action in our sample and lead to

reject the obfuscation hypothesis of impression manage-

ment as far as tone is concerned. The rhetorical features

measured by Praise, Satisfaction, and Inspiration are sig-

nificantly different across different levels of past and future

performance. CEO letters of well performing firms contain

more adjectives affirming positive characteristics (as

measured by Praise), terms expressing positive states and

encouraging messages (as measured by Satisfaction), and

nouns conveying universally admirable qualities (as mea-

sured by Inspiration).

Table 5 Comparison of rhetorical tone between lowest, highest, average performance and diction normative scores

Variables Lowest Highest Sample

average

Normative

diction score

Comparison

Lowest vs normative

diction score

Sample average vs

normative diction score

Highest vs normative

diction score


Optimism 53.1 54.0 53.5 50.6 4.9 5.8 6.7

Praise 6.2 7.1 7.3 2.6 138.2 179.8 171.3

Satisfaction 3.5 4.5 4.4 1.0 252.0 344.4 345.2

Inspiration 7.6 8.7 7.8 3.6 111.7 115.7 140.3

Blame 1.0 0.8 0.7 1.2 -14.0 -40.6 -36.2

Hardship 1.9 2.8 2.2 1.9 0.4 13.4 45.7

Denial 1.3 1.6 1.4 3.1 -59.1 -55.3 -48.2


Optimism 53.1 54.0 53.8 50.6 4.9 6.3 6.7

Praise 6.6 7.1 7.1 2.6 154.2 171.7 172.4

Satisfaction 4.0 4.5 4.2 1.0 302.5 316.2 353.9

Inspiration 7.0 8.7 8.3 3.6 93.6 130.5 141.9

Blame 1.0 0.7 0.8 1.2 -19.3 -36.4 -39.8

Hardship 2.6 1.9 2.2 1.9 35.8 18.0 0.6

Denial 1.4 1.3 1.5 3.1 -54.2 -52.5 -59.0


Optimism 53.2 54.0 53.5 5.1 5.8 6.7 5.1

Praise 6.9 6.7 7.1 166.6 173.2 157.3 166.6

Satisfaction 3.5 4.1 4.6 247.2 364.2 312.4 247.2

Inspiration 7.2 8.5 8.5 99.9 136.7 136.1 99.9

Blame 0.9 0.9 0.7 -25.3 -42.0 -22.9 -25.3

Hardship 2.1 2.5 2.2 11.9 14.9 30.9 11.9

Denial 1.3 1.4 1.5 -57.2 -52.4 -56.0 -57.2


Optimism 52.9 54.0 53.7 50.6 4.6 6.1 6.8

Praise 6.5 7.2 7.1 2.6 148.9 171.7 178.1

Satisfaction 3.6 4.3 4.5 1.0 258.5 349.1 331.3

Inspiration 6.9 9.0 7.9 3.6 91.7 119.0 149.3

Blame 0.7 1.0 0.9 1.2 -42.2 -28.4 -19.3

Hardship 2.4 2.3 2.2 1.9 25.4 13.7 19.6

Denial 1.4 1.4 1.4 3.1 -56.4 -53.6 -54.4

* p \ 0.05; ** p \ 0.01

1 The significance levels of 2 and 20 % are taken from Yuthas et al.

(2002). Optimism is obtained from the combination of sub-variables

as follows: (Praise ? Satisfaction ? Inspiration)—(Blame ? Hard-

ship ? Denial). Its value tends to vary less than the values of the sub-

variables. Hence, the significance level is set to be lower.


123

Tables 3 and 4 report the average of the total number of

words, total number of characters, characters per word, and

number of different words used in CEO letters for the full

sample and firms in the LOWEST and HIGHEST quartiles.

These measures contribute to assessing the readability of

CEO letters. As shown in Table 3, past revenue growth is

significantly associated with all the readability indicators.

Results show that CEO letters of firms reporting the highest

past revenue growth are longer (as measured by the total

number of words and characters) and contain more words

(as measured by the number of different words), yet less

complex (as measured by the number of character per

words) words. By considering the other performance

measures (i.e., past profit growth, future revenue growth,

and future profit growth), the readability indicators become

insignificant, except for the number of different words,

which remains significantly higher for firms reporting the

highest past and future profit growth, as shown in Tables 3

and 4.

Table 5 shows that most scores computed on our sample

data significantly differ (i.e., more than 2 and 20 % for

master variable and sub-variables, respectively) from

DICTION normative scores. Although both are based on

Fortune 500 firms, this difference indicates that the rhe-

torical features of CEO letters included in our sample are

not similar to those of the sample used to compute the

DICTION normative scores. A plausible reason for such a

remarkable difference could be the particularly unfavorable

economic period examined in our study. Indeed, if the

rhetorical features of CEO letters would not vary across

periods and firms, we would be unable to observe such a

difference with the normative score computed by the

authors of DICTION in a different context. The fact that

we find a difference suggests that rhetorical features of

CEO letters are influenced by the period and sample

composition. Overall, the differences between our sample

scores and the DICTION normative scores recommend

using DICTION normative scores with caution in research

based on different samples.

Regression Results

To test whether there is congruence between firm perfor-

mance and rhetorical tone of CEO letters, we ran a

regression model where future performance (measured by

FROA) is a function of past performance, readability

indicators, all five DICTION master variables, and several

control variables. A significant effect of Optimism on

future performance, after controlling for past performance

(measured by ROA) and other relevant variables, would

indicate that stakeholders could effectively read CEO let-

ters to gauge performance results. Specifically, if perfor-

mance were found to be congruent with rhetorical tone, it

would suggest that CEO letters are not misleading, as

contended by impression management studies. Rather,

according to Yuthas et al. (2002), it would suggest that

CEO letters adhere to the sincerity principle of discourse

ethics as argued by the Theory of Communicative Action.

The use of a multivariate analysis represents a sophistica-

tion of most prior studies regarding corporate narrative

disclosure, which are generally based on comparisons of

mean values between firms performing poorly and firms

performing well (Merkl-Davies and Brennan 2007). Yuthas

et al. (2002) did not perform a multivariate analysis due to

the very small size of their sample.

The explanatory power of Optimism to predict future

performance is tested by controlling for several factors.

The inclusion of past performance in our regression model

enables us to measure the marginal effect of rhetorical tone

on future performance. As discussed in the previous sec-

tion, rhetorical tone is influenced by past performance and

a multivariate analysis allows single effects to be isolated.

A significant effect of Optimism on future performance,

after controlling for past performance, would suggest that

rhetorical tone of CEO letters is not merely the outcome of

past performance, but it also contains useful forward-

looking information for stakeholders. Furthermore, we

control for the strategy and opportunity to grow through the

Capital Expenditures to Assets Ratio and Price to Book

Ratio. Number of Shareholders controls for the breadth of

CEO letters’ readership and contributes to addressing

interaction effects between preparer and users (Merkl-

Davies and Brennan 2007). Intangible Assets to Assets

Ratio is included to control for capital intensity. We also

control for firm size by including Total Revenue and

Number of Employees in our regression model. Finally, we

include a dummy variable (i.e., Loss) to distinguish loss-

making from profit-making firms, as in Li (2008). Variance

inflation scores between variables are all lower than 2.3,

revealing no significant multicollinearity problem.

Table 6 provides correlation coefficients between our

variables and Table 7 provides results of a generalized-

least-square (GLS) regression model testing the signifi-

cance of Optimism in predicting FROA. We performed the

Hausman test to choose between fixed and random effect,

and the results suggested the use of fixed effects. We also

conducted a heteroskedasticity test, whose result led us to

use a robust estimator within cluster correlation (i.e.,

Rogers standard errors). The final model controls for

Activity, Certainty, Realism, Commonality, and a read-

ability indicator (i.e., Text Length) in addition to ROA,

Capital Expenditures to Assets Ratio, Price to Book Ratio,

Number of Shareholders, Intangible Assets to Assets Ratio,

Total Revenue, Number of Employees, and Loss.

The statistical significance of its regression coefficient

(p \ 1 %) shows that Optimism is a significant predictor of


123

future performance. Optimism is positively correlated with

FROA, indicating that CEO letters from firms with better

future performance are more optimistic. This result sug-

gests that the rhetorical tone of CEO letters is congruent

with firm performance. According to Habermas (1990), this

result implies sincerity in CEO letters, consistent with his

Theory of Communicative Action. Table 7 also reports a

statistically significant and negative coefficient (p \ 5 %)

for Commonality. The use of engaging language increases

the value of Commonality. Therefore, the negative coeffi-

cient of Commonality indicates that non-engaging language

is associated with lower performance. As pointed out by

Yuthas et al. (2002), the interpretation of Commonality for

discourse ethics is not trivial. In our research design,

Commonality is a control variable, and its significance

highlights the importance of controlling for multiple rhe-

torical features to capture the association between perfor-

mance and principles of discourse ethics.

The coefficients of the other three DICTION master

variables are statistically insignificant (p [ 10 %). Fur-

thermore, the results in Table 7 show that Text Length

(measured as the total number of characters) is not a sta-

tistically significant predictor of future performance

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Table 7 Generalized-least-square regression model on future return

on assets (FROA)

Variables Estimate SE T

Intercept -0.003 0.130 -0.30

Control variables

ROA -0.001 0.001 -0.37

Capital expenditures to assets ratio 0.001 0.001 1.03

Price to book ratio 0.001 0.001 0.68

Number of shareholders -0.010 0.014 -0.72

Intangible assets to assets ratio 0.001 0.002 0.71

Total revenue -0.001 0.001 -0.09

Number of employees -0.030 0.030 -1.00

Loss 0.030 0.010 2.80*

Text length -0.005 0.002 -1.65

Diction variables

Activity 0.001 0.001 0.23

Optimism 0.004 0.002 2.83**

Certainty -0.001 0.001 -0.21

Realism 0.001 0.001 1.36

Commonality -0.004 0.001 -2.34*

R2 0.167

F score 3.356 **

Intra-class correlation coefficient

(ICC)

0.917

Hausman test = 129.14, p = 0.000; heteroskedasticity

test = 7.9e?36, p = 0.000

N. obs.: 664; * p \ 0.05; ** p \ 0.01


123

(p [ 10 %), when controlling for DICTION master vari-

ables. Contrary to other prior studies (e.g., Li 2008), our

findings do not support a significant linear association

between performance and readability indicators. This lack

of evidence suggests other factors could be essential in

determining the readability of CEO letters, such as CEO

communication skills and business complexity. Moreover,

it highlights the relevance of examining the thematic

content rather than the syntactic structure alone (Sydserff

and Weetman 2002). The insignificance of readability for

predicting future performance could also be due to features

of the empirical design.

Conclusions

CEO letters can be viewed as either a form of strategic

action designed to mislead interpretations and expectations

of performance results, as claimed by studies on impression

management (e.g., Aerts 2005), or a form of communica-

tive action aimed at seeking mutual understanding of per-

formance results, as claimed by Habermas’ Theory of

Communicative Action (1984, 1987). Prior research has

predominantly conceived optimistic rhetorical tone as a

form of impression management. According to impression

management, rhetorical tone is manipulated to distract

from past performance and distort expectations of future

performance. This manipulation violates the sincerity

principle of discourse ethics according to which interpre-

tations are offered to facilitate understanding (Yuthas et al.

2002). On the contrary, according to communicative

action, past performance shapes the rhetorical tone of CEO

letters, which contains information useful to predict future

performance. Hence, the congruence between rhetorical

tone and performance indicates sincerity of communication

(Yuthas et al. 2002).

To explore the validity of these two competing views,

we empirically investigated the congruence between firm

performance and rhetorical tone in a large sample of CEO

letters of large publicly traded U.S. firms. We analyzed the

statistical association of Optimism computed by the lexical-

analysis software DICTION and both past and future firm

accounting returns. Results are based on univariate analy-

ses examining how rhetorical features vary across different

performance quartiles and a GLS regression model con-

taining several predictors of future firm performance.

Our findings show the existence of a significant asso-

ciation between Optimism and financial performance.

Results based on univariate analyses indicate that past

performance significantly affects the rhetorical tone of

CEO letters. Regression analyses strengthen this evidence,

showing a positive association between Optimism and

future accounting return, while controlling for other

rhetorical features, text readability, firm characteristics,

and past accounting return. Specifically, in our univariate

analyses comparing the quartiles of firms with the highest

and lowest performance, the optimistic tone of CEO letters,

which is often used in prior studies as the primary indicator

of impression management, is found to be higher in CEO

letters of firms with the highest accounting return. In other

words, CEO letters of the best performing firms are the

most optimistic. Moreover, Optimism is a statistically sig-

nificant predictor of future performance in our regression

model. From these results, we infer that the tone of CEO

letters is congruent with performance indicating the

adherence to the sincerity principle of discourse ethics. The

analysis of the DICTION variables’ structure supports this

conclusion by highlighting the significant association of

three specific rhetorical features denoting optimistic tone,

namely Praise, Satisfaction, and Inspiration, with firm

performance.

Based on our empirical finings, we draw conclusions

that contribute to the development of a framework to

examine discourse ethics of financial communication.

Following Yuthas et al. (2002), our research focuses on the

sincerity principle of discourse ethics by empirically

exploring the tension between impression management and

communicative action of discretionary narrative disclosure.

The congruence between optimistic tone and both past and

future performance found in our sample supports the effect

of preserving organizational legitimacy on CEO rhetorical

features, as argued by Yuthas et al. (2002). Future research

could investigate the interaction between self-serving

interests and corporate and individual reputation as it

affects business ethics. Further, our empirical findings

based on an analysis of CEO letters published in the wake

of the global economic crisis indicate that context is a

crucial factor shaping rhetorical features of corporate nar-

ratives and related rhetorical manipulation strategies. This

is an extension of the framework proposed by Yuthas et al.

(2002) and highlights that incentives of impression man-

agement and adherence to principle of discourse ethics are

sensitive to external context. Future research could extend

our empirical study by examining different contexts,

including different countries, economic conditions, and

organizational cultures. Finally, the empirical evidence

provided in this paper raises concerns about the method-

ology followed by prior studies stressing impression

management. A broader measurement of rhetorical features

is needed to capture alternative rhetorical manipulation

adequately. The development of new lexical-analysis

techniques and electronic availability of a wider set of

disclosure vehicles offer opportunities for more rigorous

research on large samples.

Two issues remain critical for the interpretation of our

results and the advancement of knowledge about discourse


123

ethics of corporate narratives. First, the issue of inten-

tionality of impression management has implications for

examining discourse ethics of corporate narratives. In the

definition quoted above, Schlenker (1980) asserts that

impression management can be conscious or unconscious,

but Provis (2010) stresses that deceptive narrative disclo-

sure has harmful consequences only if it is intentional.

Prior literature has not resolved the issue of intentionality

of impression management, and this creates a challenge for

the examination of its ethical dimension. The assessment of

ethics in corporate narratives should consider the inten-

tionality, and future research should develop methodolo-

gies to distinguish between intentional and unintentional

rhetorical manipulations. This would also offer a relevant

contribution for the development of mechanisms to prevent

and detect unethical discourse in corporate narratives.

Second, the issue of earnings management affects the

validity of testing the adherence to principles of discourse

ethics based on congruence with financial performance

(Patelli and Pedrini 2013). By managing earnings, execu-

tives manipulate financial metrics distorting the measure-

ment of performance. Accounting literature has provided

ample evidence on the determinants and consequences of

earnings management. However, knowledge of alternative

non-financial measures that can be effectively used to

assess firm performance is still limited. Many studies

suggest that relying on one single measure (either social or

financial) seems inadequate and misleading (e.g., Kaplan

and Norton 1996; Dossi and Patelli 2010; Epstein et al.

2013). More research on performance measurement should

support the empirical analysis of discourse ethics, espe-

cially regarding principles of sincerity and truth.

Our findings contribute to the literature on discourse

ethics by applying the operationalization proposed by

Yuthas et al. (2002) to a large sample of U.S. CEO letters.

We also contribute to strategic management research by

examining the effect of CEO rhetorical tone on corporate

disclosure and, more broadly, on business management

(Bamber et al. 2010). Our results showed CEO letters are

important corporate communication vehicles that contain

information about future performance. Arguments imply-

ing that CEOs are merely overconfident and opportunistic

leaders seem partial and simplistic. Our study calls for

more research on the variety of leadership styles and their

effect on corporate disclosure. Moreover, our findings are

consistent with theories that predict a positive effect of

economic crises on management thanks to more focused

managerial attention and decision-making. Future research

could provide evidence that is more direct concerning CEO

communication styles in different economic cycle stages.

Finally, by examining an important element of financial

narrative disclosure, we contribute to the accounting and

finance literature on voluntary disclosure. In particular, we

provide empirical evidence concerning the information

content of CEO letters and offer a methodology to analyze

a comprehensive set of lexical features beyond mono-

dimensional readability indicators.

Notwithstanding their relevance, our conclusions come

with some caveats. First, we focus on quantitative research

techniques to explore the relationship between firm per-

formance and rhetorical features of CEO letters, thereby

assuming language can be quantifiable. As pointed out by

Merkl-Davies and Brennan (2007), more qualitative

approaches, such as case studies and longitudinal analyses,

could better grasp important concepts in discourse ethics.

Second, our results are affected by the shortcomings of

DICTION, which are discussed in-depth in Hart (2001). In

particular, we warn about the issue of polysemy, which

refers to the semantic independence of DICTION variables

from the context (e.g., Henry 2008). Finally, our sample

comprises CEO letters published in 2 years. Through

possible improvements in the process of collecting and

formatting CEO letters for DICTION, future research could

test the moderating effect of different economic contexts

on the relationship between firm performance and rhetori-

cal features in a more direct fashion.

Acknowledgments The authors would like to acknowledge

Amanda Murphy, Philipp Schaberl, and Robert Giacalone for their

comments on previous versions of this manuscript.

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