Does Disclosure Tone Reflect REIT Managerial Sentiment? An Investigation

We investigate whether the disclosure tone in REIT financial statements reflects managerial sentiment, i.e., information about future real estate investments by REITs, or tone management aimed at influencing investor reactions. We extract different disclosure tone measures from 10-Ks and 10-Qs of equity REITs over the period of 2002 to 2016 using a REIT-specific dictionary. We find a positive relationship between disclosure tone and REIT investments in the next quarter. Thus, the more positive (optimistic) REIT disclosure tone is, the higher are future property investments by a REIT. This suggests that REIT disclosure tone indeed reflects managerial sentiment and is informative to investors. We do not find evidence of tone management. We furthermore show that institutional investors, growth options, and REIT size further increase the informative value of disclosure tone as a measure of managerial sentiment for future REIT investments.