Impression management tone and equity mispricing: Evidence from China

Abstract

Although several studies have shown how managers’ discretionary preferences influence capital markets, little is known about whether impression management tone as a manager’s disclosure strategy reduces equity mispricing. This study aims to explore this relationship empirically. We find a negative relationship between impression management tone, measured as a positive abnormal tone in annual reports and equity mispricing. Notably, managers have discretionary purposes for adopting corporate disclosure strategies, particularly when equity is undervalued in the last fiscal year. Further tests reveal that such tone-based mispricing management comes at the expense of investors, who bear equity and crash risks without realising corresponding capital gains. Finally, impression management tone effects exist in the alternative dictionary. This study highlights the importance of studying managerial disclosure strategies that affect equity mispricing.