Annual report tone and bank risk-taking behavior: Evidence from China

This paper explores how the textual tone of annual reports affects banks' risk-taking. This paper divides tone into normal tone and abnormal tone and examines their influences on the risk-taking of banks' assets and liabilities, respectively. By collecting 326 samples of 38 Chinese A-share listed banks' annual reports during 2000-2020, the study finds that a more positive normal tone in annual reports indicates an increase in bank risk-taking behavior in the future. The competitive pressure and the policy shock plays a negative moderating role whereas the profitability has a positive moderating impact. Besides, the impact of the positive tone on increasing bank's risktaking behavior is more prominent for state-owned banks than that of non-state-owned banks. However, the abnormal tone can not predict the bank's future risk-taking behavior. Finally, our findings show that the normal tone can provide forward-looking valuable information and has a significant predictive ability for a bank's future risk-taking behavior and its insolvency risk.