Terrorist Attacks, Managerial Sentiment, and Corporate Disclosures 

1 Jul 2020


Chen Wen; Wu Haibin; Zhang Liandong. 

Published in The Accounting Review, July 2020 

Voluntary disclosure has a vital role in the well-functioning of the financial markets. Firms provide news to outsiders, especially investors, regarding their forecast of future performance and business decisions. The quality of voluntary disclosure, particularly whether the disclosure is biased or not, affects how outsiders perceive and interpret the news and act on it subsequently. 

Using terrorist attacks in the United States as exogenous adverse shocks to managerial sentiment, Dr Wen Chen and Dr Haibin Wu of the Department of Accountancy and co-author writing in the Accounting Review find that firms located in metropolitan areas that have been attacked issue more downward biased earnings forecasts. 

“The effect is stronger for firms with higher operating uncertainty and firms with younger, inexperienced, or less confident CEOs and it is weaker for firms located in states with increasing violent crime rates,” they say. 

Chen and Wu and their co-author also confirm the impact of negative managerial sentiment by showing that firms in attacked areas use more pessimistic words in their quarterly and annual filings. 

That managers have discretion over the quality of voluntary disclosure is well known. A large literature shows that managers act rationally and strategically to choose optimal disclosure quality in order to maximize firm value or personal gain. Recent literature shows that the individual attributes of executives, such as demographic characteristics, personal backgrounds, and experiences, have impact on corporate disclosure activities. 

“We extend this line of disclosure research by focusing on the impact of managerial sentiment, which refers to the misbeliefs held by managers,” they say. 

The study furthers the understanding of firm financial reporting and disclosure by focusing on the short-lived and time-varying psychological bias which characterizes managerial sentiment. 

“Our study is also related to the broad discussion on managerial attributes and corporate policies. We add to this literature by providing evidence that managerial sentiment, which is a time-varying behavioral factor rather than an individual attribute, also matters in forming firm disclosure practices.” 

By studying the effects of individual behavioral factors on corporate decisions, the study is of wider interest to investors and other stakeholders who may better comprehend the information disclosed by corporations.