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ARTICLE · 11 FEBRUARY 2019

Disclosure Tone After Financial Misconduct

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In a recent paper titled "Damage Control: Changes in Disclosure Tone After Financial Misconduct," authors Rebecca L. Files, Alex Holcomb, Gerald S. Martin, and Paul Mason assess how companies change the tone of...

United StatesFinance and Banking
Anna T. Pinedo
Anna T. Pinedo
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In a recent paper titled "Damage Control: Changes in Disclosure Tone After Financial Misconduct," authors Rebecca L. Files, Alex Holcomb, Gerald S. Martin, and Paul Mason assess how companies change the tone of their required disclosures in order to mitigate the effect of financial misconduct. In evaluating tone, the study focuses on the percentage of negative, litigious, and uncertain words in corporate disclosures of 232 companies that were sanctioned by the US Securities and Exchange Commission or the Department of Justice. Following a review of disclosures, the authors found a substantial increase in the use of additional negative words in the periods during which the companies were facing regulatory inquiries or investigations and in the period following the announcement of an enforcement action. The authors also found that companies ultimately subject to an SEC or DOJ order generally used more negative words in their disclosures during the investigative phase. The

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