Strategic Forward-Looking Nonearnings Disclosure and Overinvestment

We examine whether tone management in different aspects of forward-looking statements (FLSs) is related to managers’ self-serving overinvestments. Using data for U.S.-listed firms between 2003 and 2019, we provide novel evidence that the abnormal tone of nonearnings-related qualitative FLSs' is significantly and positively related to firms’ overinvestments but that other aspects of FLSs are insignificant to overinvestments. Moreover, this relation is more substantial in financially unconstrained firms. Our findings reveal the heterogeneous roles of different aspects of FLSs in firms’ opportunistic disclosures concerning future overinvestments. Further analyses also indicate that this relationship is more pronounced for firms with less monitoring and managers with greater career concerns. We also employ instrumental variables with a two-stage least-square approach and a Heckman selection model to mitigate the endogeneity issue. Our results are robust after conducting a battery of robustness tests. Overall, our findings provide robust evidence that managers are likely to strategically manipulate nonearnings-related qualitative FLSs to mislead investors’ perception of firms' future fundamentals to achieve self-serving purposes.