The Impact of Managerial Tone on the Value Relevance of Accounting Information

[Purpose] This study empirically investigates the impact of managerial tone on the value relevance of accounting information. Management's tone, encompassing linguistic patterns and emotional expressions in communication, reflects managerial communication styles. Notably, the Management Discussion and Analysis (MD&A) section of annual reports, subject to audit and regulatory oversight, primarily serves as a channel for conveying private information rather than being primarily used as a tool for opportunistic disclosures. [Methodology] We analyze the relationship between management's tone in MD&A disclosures and the value relevance of accounting information using data from companies listed on the Korea Composite Stock Price Index (KOSPI) and the Korean Securities Dealers Automated Quotations (KOSDAQ) markets from 2011 to 2023. [Findings] Our analysis reveals that a more optimistic managerial tone is positively associated with the value relevance of net income but negatively associated with the value relevance of net assets. This suggests that investors place greater confidence in net income information when management employs more optimistic tone while simultaneously placing less emphasis on net asset information. Furthermore, when decomposing net income into operating cash flows and accruals, we find that both components exhibit enhanced value relevance with increased management optimism, with accruals showing a particularly pronounced effect. [Implications] This study contributes to the literature by empirically documenting the influence of non－quantitative information, specifically managerial linguistic expressions in MD&A reports, on the value relevance of accounting information. Our findings demonstrate that narrative disclosures complement traditional financial metrics in firm valuation processes.