The Hidden Information Content: Evidence from the Tone of Independent Director Reports

The paper investigates the link between the information content of independent directors’ reports (IDRs) and firm financial outcomes. By conducting sentiment analysis of 23,984 IDRs of the Chinese listed companies from 2004-2012, we find that the positive tone of IDRs is likely to signal an increase in future firm performance. We also posit that the tone of IDRs and its association with firm performance depends on director’s incentives to monitor. Our results suggest that independent directors with greater career concerns (i.e., young directors or experts in accounting or finance) are more critical in evaluating firm fundamentals and express more negative tone in their reports. The relationship between the negative tone of IDRs and future firm performance is stronger for firms with greater monitoring needs. Overall, our evidence is consistent with the conjecture that career concerns motivate independent directors to disseminate information to external stakeholders.