Tone Distance: Managerial Tone Divergence and Market Reaction to Earnings Announcements

ABSTRACT We evaluate the market reaction to the between‐manager variance of tone within an earnings call, which we term Tone Distance. We find that greater differences in Tone Distance are negatively associated with event period returns surrounding earnings announcements. Consistent with the notion that Tone Distance is informative, we show that Tone Distance is a positive predictor of stock volatility, information uncertainty, and operational risks. Tone Distance is inversely related to future growth prospects. Tone Distance also positively predicts monthly stock returns following the earnings announcement. We find that Tone Distance is robust to a variety of alternative constructions and after accounting for analyst tone. Overall, the results are consistent with investors interpreting greater Tone Distance as an information leakage related to the future performance of the firm.