Rational catering of irrational emotions: Investor sentiment and executive tone

In China, investors generally make decisions depending on the intonation of executive announcements. A total of 20,328 observations are sampled from the Chinese equity market between 2005 and 2019. We perform principal component analysis to produce monthly sentiment indices and calculate the weighted average of the value over the fiscal year to measure the degree of investor sentiment. The results of the empirical analysis reveal that: (1) there is a significant positive correlation between market-level investor sentiment and executive tone, (2) stock price and trading-volume pressures on executives, and firm-level investor expectation and gambling tendency positively moderate the relationship between investor sentiment and executive tone, (3) executive optimism does not mediate the association between investor sentiment and executive tone, and (4) manipulated and real intonations are non-homogeneous tactics adopted by rational managers to cater to changes in investor sentiment. These findings indicate that executives' intonations are both an extension of firms' current and past performances and managers' decision-making based on sentiments and behaviors of irrational investors, which are consistent with the Catering Theory. In addition, rational executives tend to adopt various intonation tactics to respond to investor sentiment to avoid declines in stock prices and trading volumes.