The Effect of Linguistic Style in an MD&A on Stock Market Reaction

[We’re pleased to welcome authors Dr. Mohamed M. Tailab and Dr. Marshall J. Burak of Lincoln University. They recently published an article in International Journal of Business Communication entitled “Examining the Effect of Linguistic Style in an MD&A on Stock Market Reaction,” which is currently free to read for a limited time. Below, they discuss this research:]

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Language as the currency of most human social processes can be converted to words. Investors and market participants attach very different connotations to the words, rely more on intuition than hard data, and react more to the verbal tone. Quantitative information contained in financial annual reports in general and in an MD&A in particular does not provide a complete picture to the investors about the expected firm value. So, the need arises to analyze the effect of narrative disclosures on market reaction as well. In addition, analyzing narrative disclosures is more easily understood than quantitative data, but at the same time it offers a different perspective. This initiated our research interests and concerns to explore in depth the impact of linguistic style in narrative disclosures on decision makers.Therefore, we decided to investigate the effect of language used in the MD&A between the speaker (management) and the listeners (investors), which in turn influences market reaction. We had hypothesized that the stock market (return and risk) has a significant response to the linguistic tone contained in the MD&A. Even though the initial hypotheses have never been proven, this study proves principles about the usefulness of an MD&A to investors.

This work expands on the understanding of the business communication literature by using an interdisciplinary approach. This approach has emerged the narrative disclosures with applied linguistic and market reaction. To this end, this paper is the first to use the partial least squares – structural equation modeling (PLS-SEM) approach and contributes to the existing body of knowledge in several ways including (a) a new approach to strengths, (b) evaluation of MD&A content, (c) proof that MD&A length does not play a strong role in market reaction, and (d) findings that capital assets pricing model (CAPM) or Farm-French models are more reliable than the realized volatility.

The study indicates that the average of negative tone is greater than the average of positive words in the MD&A. This may be because the study period started in 2010, there is a possibility that the financial crisis still has an effect on the verbal tone of MD&A reports, and allows the management writers to be more conservative. One interesting observation is that the linguistic content in an MD&A was not consistent with financial performance. It can be concluded that that management most likely does not use its financial performance as a guide for writing the MD&A, or maybe it has another criterion for delivering its message to the investors.
A challenging aspect of this work is that using dictionaries built by researchers in other fields (e.g., psychology) may not be appropriate for a content analysis of financial reports. We have limited our research by neglecting the investors’ types and their preferences. So, it would be better if future researches studied the investors’ preferences, what information investors need to find in the MD&A before making their decisions.The study recommends conducting a more efficient analysis of the narrative disclosures to investigate whether management writers communicate truthful information to investors by offering relevant data about financial performance.

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The Just World Fallacy as a Challenge to the Business-As-Community Thesis

[We’re pleased to welcome author Dr. Matthew Sinnicks of Northumbria University. Dr. Sinnicks recently published an article in Business & Society entitled “The Just World Fallacy as a Challenge to the Business-As-Community Thesis,” which is currently free to read for a limited time. Below, Dr. Sinniscks reflects on the impact and innovations of this research:

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What motivated you to pursue this research?

To be honest, I stumbled upon the idea by chance. There has been some really interesting work done on ethics and the results of personality psychology over the past few decades, and I was perusing some of this literature in a quite unsystematic way when I came across a few articles on the just world fallacy. It struck me as an interesting topic, and one worthy of more philosophical reflection than it has received.
Once I got going, in addition to the fact I found the idea interesting, I was motivated by the frustrating fact that organisations, which most self-consciously regard themselves as virtuous communities, are, in fact, often furthest from that ideal, and so it seemed to me to be worth thinking about the conditions under which Aristotelian community might flourish within organisations.

Were there any specific external events—political, social, or economic—that influenced your decision to pursue this research?

Not consciously, but the fact that people who occupy positions of power and prestige often do so despite their lack of merit, and often deserve anything but deference, is a depressing lesson to be drawn from recent political events.

In what ways is your research innovative, and how do you think it will impact the field?

I hesitate to speculate on how my article will affect the field, but I would be delighted if it helped to start a conversation about the implications of the just world fallacy for human relationships both in organisations and perhaps in society generally. Furthermore, there are a number of business ethics scholars who I admire enormously, but who are far more optimistic than I am about the possibility of community within organisational life under contemporary capitalism, so I would also be delighted if my article encouraged them to address the egalitarian challenge I raise in their future work.

However, the more one reads about psychological biases, the more one becomes aware of how poor most people are at evaluating themselves, and how prone most people are to be unwarrantedly optimistic about their chances of success, so it’s important to note that these are hopes rather than expectations!

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JPMorgan Chase, Bank of America, Wells Fargo, and the Financial Crisis of 2008

[We’re pleased to welcome author Dr. Lauren Berkshire Hearit of Hope College. Dr. Hearit recently published an article in International Journal of Business Communication entitled “JPMorgan Chase, Bank of America, Wells Fargo, and the Financial Crisis of 2008,” which is currently free to read for a limited time. Below, Dr. Hearit reveals the inspiration for conducting this research :]

JBC_53_2_Covers.inddIn 2010, I participated in a public policy seminar focused on the 2008 Financial Crisis that sought to understand and untangle the policies that led the global economic crisis. Starting a research interest that continues to drive me to this day, I took a deep dive in to the area, reading every new book that attempted to explain the multiple causes of the crisis. In 2013, I came across an article from The Wall Street Journal that reported that the number of banks nationwide had fallen below 7,000 – for the first time since federal regulators began tracking these numbers in 1934. This raised a number of questions: “how did these banks do this? How are they bigger than ever?” As I investigated how almost every major Wall Street bank avoided bankruptcy and increased in size, I found an integrative approach to economic policy communication was a valuable informative lens by which to study the choices made by these banks. By and large, these banks used discourse to respond to public pressure by talking publicly about their individual performance and robust strength following the financial crisis—while simultaneously using discourse privately in an effort to influence and avoid increased regulation and policy.

In my article, I use discourse analysis to examine how JPMorgan Chase, Bank of America, and Wells Fargo utilized language following the Financial Crisis as a corporate resource in the same way they use personnel, capital and technology. I examine each bank’s news releases, annual reports, and annual letter to shareholders from 2009 and compare what each bank communicated to how it was covered in the mainstream news media. I ultimately argue the discourse of finance privileges the upper-class and wealthy—and is designed to minimize the role of the middle and working classes from participation in public policy decision-making. As they tailored their post-crisis discourse to focus on bank strength and stability, these major Wall Street banks utilized a terminology (e.g., mortgage-backed securities, subprime mortgages, derivatives trading, etc.) that made participation in the crisis resolution difficult, choosing language that was largely inaccessible to the public. The public largely had little choice but to accept these banks’ actions, despite the negative ramifications and impact on the global economy, as the banks crafted a discourse-based response that ignored the complexity of the discussion, policy changes, and regulation required to prevent another financial crisis.

This article seeks to spur future study on strategic financial and economic communication. Work at the intersection of public policy, economics, and strategic communication has begun to examine this area of interdisciplinary research, but scholars need to do more to bridge work from these different disciplines, using multiple methods, in order to examine the impact of economic policy communication on organizational financial performance, the economy, and crises.

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When Is There a Sustainability Case for Corporate Social Responsibility?

[We’re pleased to welcome authors Minna Halme of Aalto University School of Business, Jukka Rintamäki of City University of London, Jette Steen Knudsen of Tufts University, Leena Lankoski of Aalto University School of Business, and Mika Kuisma of Aalto University School of Business. They recently published an article in Business & Society entitled “When Is There a Sustainability Case for CSR? Pathways to Environmental and Social Performance Improvements,” which is currently free to read for a limited time. Below, Dr. Miklian reflects on the impact and innovations of this research:]

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What motivated you to pursue this research?

While this article focuses on sustainability performance, it is based on a joint research project of 12 universities which originally set out to study societal impacts of CSR. We were motivated by the fact that there is so little research on societal impacts CSR, and so much need for it among policy makers and non-governmental organizations.

What has been the most challenging aspect of conducting your research? Were there any surprising findings?

The difficulty of getting data on impacts of companies’ CSR activities took us by surprise. We had chosen a sample of companies that – based on publicly available ratings – were either leading or good CSR performers, but data on societal impacts of CSR was still scarce. And not only scarce: CSR practices, performance and impacts were often also confused with one another in the company reporting and in managers’ oral accounts. It took massive cross-checking of interview data, and public and internal document data to get the study done.

It also became strikingly evident that in the end of the day researchers as well as sustainability ratings are at the mercy of companies’ self-reported sustainability data. Databases and ratings such as the KDL, Asset4 or the like tend to be viewed as reliable data. Investors and management academics measuring corporate sustainability performance widely use these ratings as if they were drawn from “hard objective data”. In reality such data is self-reported by companies.

Aggravating the risk of mismeasurement is that these schemes are untransparent: users (researchers, investors) do not necessarily know what data exactly composes each indicator. This is paradoxical as for research purposes it is considered positive if “the performance data is from an external source” – a statement which effectively closes the door from discussion about validity problems of performance data used. Sustainability databases should make their performance measurement data more transparent so that users have a means to assess what has been measured as environmental and social performance.

In what ways is your research innovative, and how do you think it will impact the field?

We separated CSR activities (antecedents of sustainability performance) from the performance itself, and did not rely on narrow data but instead constructed performance schemes for assessing both environmental and social performance. In addition to management researchers, our team had wide sustainability performance knowledge base from natural science to social sustainability studies. We used both externally available and internal document data, interviewed companies as well as met with their stakeholders to complement and verify the data. In other words, we went beyond analysts adhering to data sets like KDL, Asset4 or TRI.
Our configurational approach makes it possible to discover that different pathways are associated with environmental and social performance (non)improvements, and that pathways to success and failure are for the most part not symmetrical, which has not been shown before with any larger dataset.

We expect that our research will encourage more informative future research on the influence of CSR policies and practices onto sustainability performance. We hope it raises the bar for more comprehensive future measurement of sustainability performance of companies, making the research in the field more useful for policy makers who seek to steer corporate performance and for company managers, who struggle to understand what kind of CSR is beneficial for improvement of sustainability performance.

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On SAGE Insight: Outsourcing Services to Improve Financial Performance: Is There a Limit?

[The following post is re-blogged from SAGE Connection. Click here to view the original article.]

gbra_19_2_cover_-231x300The outsourcing of both manufactured goods and services has been identified as a key factor in improving companies’ financial performance. This has contributed to the practice spreading considerably in recent years and becoming the norm.

In general terms, when a company decides to outsource an activity it is because it considers that it will have positive effects, such as cost reductions, less need for capital investments, a greater focus on its core business and increased flexibility. However, that decision also entails a series of disadvantages and risks, such as the possible loss of control over the outsourced activity, which might result in a reduction in the quality of the outsourced good or service, and an overestimate of the cost savings linked to the outsourcing. These disadvantages are intensified as the outsourcing level increases and can reach the point that they counteract the positive effects of the process. These advantages and disadvantages linked to the decision to outsource impact on the company’s financial performance.

The studies that have analyzed the financial effects of outsourcing assume that the relationship is positive and linear, that is, the greater the level of outsourcing, the better the financial performance. However, the widely differing results of these studies raise doubts as to this point of view and question whether it is logical to define the relationship between the outsourcing level and the company’s financial performance in this way, as outsourcing involves not only advantages but also disadvantages. Read more…

Abstract

Outsourcing has been identified as one of the key factors for improving companies’ financial performance. Moreover, the procurement of business services has become an important element of companies’ acquisition of external resources. However, there is a lack of evidence linking services outsourcing and performance. Limited prior literature has mostly assumed that this relationship is positive and linear. Our empirical study reveals that firms may be able to increase their performance through services outsourcing; however, this is only true up to a point, beyond which the performance decreases as a consequence of further outsourcing. Identifying the type of relationship between the variables under study is a key point to company managers formulating their service outsourcing strategies. They must be aware that there is a level of outsourcing that should not be exceeded. Future research should help managers to determine which is the most effective level of service outsourcing for their companies.

Read the article for free

Article details
Outsourcing Services to Improve Financial Performance: Is There a Limit?
Carlos Sanchís-Pedregosa, María-del-Mar Gonzalez-Zamora, María-José Palacín-Sánchez
First Published October 9, 2017
DOI: 10.1177/0972150917713274
From Global Business Review

March Issue of Family Business Review

Read the March Issue of the Family Business Review, and stay up to date with the latest research on Family Business and Family Firms.
fbra_30_2.coverFamily Business Review (FBR) a refereed journal published quarterly since 1988, is a scholarly publication devoted exclusively to the exploration of the dynamics of family-controlled enterprise, including firms ranging in size from the very large to the relatively small.

To read more about the issue click here.

To contribute to the scholarship please visit the submissions page.

 

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Theorizing Business and Local Peacebuilding

[We’re pleased to welcome authors Jason Miklian of the University of Oslo, and Juan Pablo Medina Bickel of the Universidad de los Andes. They recently published an article in Business & Society entitled “Theorizing Business and Local Peacebuilding Through the “Footprints of Peace” Coffee Project in Rural Colombia,” which is currently free to read for a limited time. Below, Dr. Miklian reflects on the impact and innovations of this research:

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In what ways is your research innovative, and how do you think it will impact the field

We see this article having three major impacts. First, the role of business in peacebuilding is an exciting but still emerging field, carrying many more questions than answers for scholars at present. These questions cut to the core of business roles in society, asking if, how and why firms can make a positive impact in some of the most fragile and conflict-affected parts of the world. Colombia is in many ways the ideal country to study such interactions, as it is perhaps the world’s most significant policy ‘laboratory’ for national and multinational private sector involvement in peace. Business scholars could use this case as a springboard to explore other such cases in Colombia, or similar cases in other countries, to help us collectively better refine the conditions for successful business engagement in peaceful development.

Second, we (the authors) tend to lean critical in our understandings of where and how the private sector can and should play a peacebuilding role, backed by a substantial amount of research by ourselves and others on how well-intended ventures can fail in practice. Despite our skepticism, we found that the Footprints of Peace (FOP) project made a measurable, positive, and significant positive impact on thousands of people in Colombia. Thus, a case like FOP can help show peacebuilding scholars (who also tend to lean critical) that businesses can indeed play positive peace roles in peacebuilding. The next wave of research on this topic will hopefully further refine the conditions for such to improve the likelihood for more business-peace success stories.

Third, this article uses a rigorous qualitative model as its foundation with quantitative analysis in a supporting fashion. We hope that this structure can help show the added value that qualitative and mixed-methods research can have in research on business and society, delivering deeper and richer findings than a quantitative model alone can express.

What advice would you give to new scholars and incoming researchers in this particular field of study?

(JM) I’m of course biased, but I truly feel that the role of business in peace and development is one of the most important and yet least researched fields of study today. Part of the reason for this, frankly, it’s that it’s hard work. As practitioner Mary Anderson is fond of saying, “Peace is not for amateurs.” Peacebuilding is a complex, messy, non-linear task filled with conceptual and practical potholes, and the same goes for research on peacebuilding. Adding in the private sector complicates matters even more, as it carries its own set of interests, aims and needs. Further, research in conflict environments carries its own set of ethical considerations and issues both for the subjects of study as well as for the researchers themselves – before, during and after such research is done.

Nevertheless, these interactions are a cornerstone of business involvement in the UN Sustainable Development Goals and SDG 16 (Peace, Justice and Institutions) in particular, representing some $2 trillion in business investment globally. Those wishing to look at these issues will be rewarded by being on the forefront of business and society topics today, and I deeply and warmly encourage business scholars in particular to do so. One way to help bridge the knowledge gap is through co-authorship. This article was much stronger as a joint effort than anything that either Juan Pablo or myself could have written alone. Beyond the natural advantages that co-authorship can provide in expanding ideas, rationales, and providing checks and balances, we brought complementary knowledge and expertise to the project, not only across disciplines but also across cultures. I see a great opportunity for deeper engagement between peace and business scholars in just these sorts of studies, helping bridge conceptual divides and not least help unite these two communities on a topic that both are increasingly drawn towards.

What did not make it into your published manuscript that you would like to share with us?

(JPMB) All the beautiful people that I got to meet. Their smiles, their interest to be heard and their willingness to share some of their deepest and most painful personal experiences. The charm with which I was embraced with at some farms, and of course the dozens of cups of coffee that people offered to me, including many made from home-cultivated coffee, picked, toasted and finally prepared with the same hands that I shook. In academia, large conflict databases can blur the meaning and stories behind the numbers, so fieldwork is an extremely important way to build knowledge and scholarship in a more personal and human way. Getting to know the meaning behind a single data point, and the person that is represented behind it and their life stories, can lead to research that better respects and honors those that we study. Moreover, I am a Colombian citizen who has lived most of his life in a violent country. Due to this, I’m aware of many social, political and economic struggles throughout my daily life, and my country requires a new generation of people aiming to change the current political climate.

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