Management's hoptimistic tone and financial reporting quality : the combined role of hope and optimism

Abstract

This study investigated the influence of specific elements of management’s psychology on financial reporting quality (FRQ), which is generated by the dynamic interaction of various components of an organization’s internal control system. Specifically, this study examined the combined influence of hope and optimism in top management’s tone on firms’ FRQ. Prior literature has reported conflicting findings about the effect of optimism on FRQ. This research adopted the findings of the psychology literature on positive psychology, which has suggested that researchers should examine hope and optimism together (i.e., hoptimism) when looking at their effects. Based on such evidence, this study employed a machine learning textual analysis method, created a combined measure of top management’s hoptimism, and argued that managerial hoptimism positively influences FRQ. Additionally, the study investigated the differences in the effect of managerial hoptimism on FRQ across firms with strong versus poor governance quality. This study utilized the ordinary least squares regression model with year and industry fixed effects to test the hypotheses. The study found that managerial hoptimism has a positive and statistically significant impact on FRQ. The results were robust to various validation tests, including alternative measures of FRQ and managerial hoptimism, controlling for CEO characteristics, propensity score matching and entropy balancing, and Lewbel’s (2012) instrumental variables regression method. Moreover, the study found that the positive impact of managerial hoptimism on FRQ is more pronounced for firms with weak corporate governance compared to firms with strong corporate governance, indicating a substituting effect of corporate governance quality.