Tone management examination in the CEO statements of the top 40 JSE Listed companies.
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Date
2022
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Abstract
The business sector has recently been rocked by several accounting scandals. Unfortunately,
South Africa has not been immune to this trend of fraudulent financial reporting, and investors
have suffered financial losses when these businesses eventually fail, this is why particular
attention is now on the tactics used by company leaders in the narrative disclosures. This study
examined tone management in the Chief Executive Officer (CEO) statements using the JSE's
top 40 businesses. The primary objectives were to analyse the impact of financial performance
on the normal tone of CEO statements and to investigate the influence of abnormal accruals on
the abnormal tone used in CEO statements. The study used quantile regression analysis and a
generalised linear regression model to analyse the impact of financial performance on normal
tone and to examine the influence of abnormal accruals on abnormal tone. CEO statements
from the JSE Top 40 public businesses were examined using content analysis. Findings show
a positive impact of financial performance on the normal tone of CEO statements. This
indicates that financial performance and normal tone move in the same direction, as financial
performance improves, a positive tone in CEO statements also increases. This further means
that moderately and extremely profitable companies use a more positive tone. Results also
show a negative influence of anomalous accruals on irregular tone. Meaning that anomalous
accruals and irregular tone move in different directions, when abnormal accruals increase,
abnormal tone decreases. Additionally, this suggests that abnormal accruals and abnormal tone
do not co-occur and that companies with abnormal accruals do not conceal them using
abnormal tone. It is recommended that annual financial statements users should carefully
scrutinise the tone used in CEO statements, to identify whether or not it is aimed at concealing
poor performance or motivated by good performance. The amount of flexibility and judgment
given to preparers of financial statements should be reduced to lessen the use of earnings
management practices. The study contributes to the conversation about the company's financial
reporting methods applied by public businesses listed in the JSE as well as the discussions
around earnings management practices.
Description
Masters Degree. University of KwaZulu-Natal, Durban.