Does an optimistic tone in annual reports predict better financial and non‐financial performance?

In the current paper, we investigate whether management adopts an optimistic disclosure tone to impress the corporate audience or to provide incremental information (II) by anticipating positive corporate performance. Specifically, we test whether an optimistic tone in annual reports (ARs) is a positive predictor of better financial and non-financial (environmental and social) performance in the future, or whether impression management (IM) techniques obfuscate unsatisfactory performance. Using 7140 ARs issued by publicly listed firms in the Eurostoxx600 index from 2006 to 2019, we document mixed results. First, according to the II approach, managers use an optimistic tone in ARs to communicate incremental and value-relevant information on corporate financial performance (CFP), thus aligning the perceptions of stakeholders with their personal perceptions. Moreover, managers adopt an opportunistic IM approach to communicate corporate environmental and social performance (CEP; CSP). Furthermore, our findings indicate that environmental, social, and governance (ESG) engagement positively moderates the incremental information effect on CFP disclosure, whereas corporate governance (CG) mechanisms positively moderate the link between an optimistic tone in ARs and both CEP and CSP.