A Blessing and a Burden! The U-Shaped Relationship Between Managerial Tone and Corporate Risk Taking

Although current research has demonstrated that linguistic communication of top managers could shape stakeholder expectancy and evaluations, these studies have largely neglected the potential hazards of executive communication and firms’ follow-up responses. Integrating expectancy violation theory with prospect theory, we explore how different levels of managerial tone influence corporate risk-taking by shaping different stakeholder expectancy violation scenarios, thus presenting an overall U-shaped relationship between managerial tone and corporate risk-taking. Using a computer-aided approach to identify managerial tones, our empirical study among 2007-2019 panel data of Chinese listed firms indicates that managers tend to take more risks (illustrated by high earnings volatility and acquisition spending) after delivering high-level (optimistic) or low-level (pessimistic) linguistic tones at an earnings communication conference. The study also finds firm prominence as a key moderator, that is, the managerial tone has a more significant effect on the risk-taking of prominent firms than obscure firms. The results are robust by employing alternative measures, a random-effect model, 2SLS, and GPSM. These findings contribute to the tone literature and expectancy violation theory by suggesting that managerial tone is a double-edged sword, which strongly influences firms’ following-up decisions on risk-taking.