Tone management and stock price crash risk

Managers have substantial discretion over qualitative disclosures. At the same time, disclosure tone is an important source of information to investors. In this study, I examine the relation between tone management and future stock price crash risk. Consistent with the view that managers use their discretion over disclosure tone for intentional information management, I find that tone management in the Management Discussion and Analysis of 10-K files is, on average, positively associated with future stock price crash risk, even after controlling for quantitative crash determinants and financial disclosure readability. Cross-sectional analyses reveal that the effect is more pronounced when managers have more incentives and are less constrained in manipulating disclosure tone. Collectively, my results suggest that tone management can have greater and broader capital market consequences than previously documented.