The Tone of the Management Report and the Speed of Leverage Adjustment

Document Type : Research Paper

Authors

1 Ph.D. Candidate of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran.

2 Associate Professor of Accounting, Faculty of Economics and Social Sciences Bu-Ali Sina University, Hamedan, Iran.

Abstract

Objective: Determining the amount of debt and equity in the capital structure is one of the manager's most important duties. An optimal capital structure is vital for your business area. This is because the capital structure influences risks, expected shareholder returns, and a business' sensitivity to micro and macro conditions. Deviations from the optimal structure lead to loss of business areas. On the other hand, reducing the deviation from optimal leverage depends on the level of its cost, which is defined as adjustment cost. Business units also seek to reduce the deviation between actual and optimal leverage when the benefits outweigh the costs. By examining the cost and speed of re-leveraging, business units can move more quickly towards target leverage and reap the benefits of re-leveraging. Information transparency, financial limitations, and disclosure of nonfinancial information that influences investor decision-making. Therefore, it also affects the cost and speed of adaptation. The tone of voice used in the management report as one of the nonfinancial information influences investors' judgment and subsequent decisions. It is ultimately used by management to secure the financial position of the division controlled. Therefore, this study aims to find an answer to whether the tone of management reports changes the speed of deleveraging.
Method: A lexical frequency method is used to measure the tone of management reports. It can be described as a quantitative method of content analysis. Professional English-English dictionaries are commonly used in foreign studies and some domestic studies. Using the English lexical translation is problematic. For example, an English word may have multiple Persian equivalents. It is also possible that the Persian equivalents of English words are infrequently used in Persian texts, that dictionaries are incomplete, and that there are other words with negative and positive connotations besides the Persian equivalent of translated words. Used for making dictionaries. Translated English is useless. Based on this, we first investigated and examined the reports of the board of directors and the interpretations of the model business units. We extracted more than 2000 words from these reports. To increase the effectiveness of the dictionary, the words were collected in the form of a questionnaire in the next step and made available to 10 experts in the field. Finance and Accounting, including chartered accountants, financial managers, internal auditors, and university faculty, and a developed vocabulary set to count positive and negative words in each report using MAXQDA software. Finally, the difference between positive and negative words is the total number of words measuring a positive tone (“positive tone”) and the total number of words measuring a negative tone. It is decomposed into word proportions. ("Negative tones") are used. Two metrics are used to measure a company's financial leverage: book and market. For this purpose, information on his 134 companies registered on the Tehran Stock Exchange from 2018 to 2022 was used. We used multiple regression with a generalized systematic moment approach to test our research hypotheses, controlling for year and industry influences.
Results: The results show that using a more positive tone in the management report increases the speed of adjusting the leverage towards the optimal leverage.
Conclusion: Managers can inform users about company incremental information in a positive tone. This reduces usage costs and increases usage speed. The report's positive tone will reduce corporate borrowing costs, reduce business unit information asymmetry and financial costs, and accelerate the dynamic adjustment of financial leverage. Current research reinforces research on text analysis. It also magnifies the impact of tone and the dynamic adjustment of financial leverage in funding. Examining the relationship between management report disclosures and business unit funding behavior provides the information and insight needed to develop emerging markets such as the Iranian market. This study completes the literature on adjusting financial leverage regarding nonfinancial information. Administrators can also use the results of this research to expose additional information by changing the report's tone and reducing customization costs. Therefore, increase the adjustment speed. Current findings help legislators and entities to encourage the disclosure of nonfinancial information. Additionally, managers tend to use a more positive tone in their reports, so users of this information are encouraged to review various accounting variables to confirm the veracity of this information before making decisions. Standard-setters are urged to pay more attention to controlling the language of the text of nonfinancial information in management reports, as not evaluating the writing style of management reports reduces user confidence.

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  • Receive Date: 26 February 2023
  • Revise Date: 16 May 2023
  • Accept Date: 17 May 2023

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