Risk disclosure tones and their effect on competition

PurposeThis research aims to explore the association between the tone expressed in USA annual reports, analyzing the link between risk and competition.Design/methodology/approachTwo contending expectations are considered in relation to the potential influence of the textual tone on the dynamics of competition. On the one hand, a positive tone may reveal strategic information to competitors and compromise competitive strategy. On the other hand, disclosing a negative, belligerent or ambiguous tone may not provoke a competitive reaction because a company is reporting negative news that competitors may not feel pressured to innovate or push the competitive frontier to a higher level.FindingsWe examine the effect of the tone using two competition measures: at the company level and industry level. Using these two competition measures, we find that the disclosure of good news through a positive tone pushes competition to a higher level. Also, a positive tone has a much greater effect on competition than a negative, ambiguous and belligerent tone.Research limitations/implicationsOur study contributes to the literature using an enhanced conceptual framework by showing that the examination of competition needs to consider the influence of contextual factors such as the tone of the text.Practical implicationsOffering a means to comprehend the impacts of the tone expressed in annual reports can prove beneficial for managers, shareholders, suppliers and clients seeking precise competitive information.Originality/valueThis study fills a research gap by examining the tone found in annual reports and analyzing the link between risk and competition.