MANAGERIAL ABILITY AND EARNINGS ANNOUNCEMENT TONE AS DETERMINANTS OF MARKET REACTION: THE MODERATING ROLE OF DIGITAL TRANSFORMATION IN INDONESIAN MANUFACTURING FIRMS

Abstract

This study examines the effects of managerial ability and earnings announcement tone on market reaction, and tests the moderating role of digital transformation in these relationships. The study is grounded in Signaling Theory (Spence, 1973) and the semi-strong form of the Efficient Market Hypothesis (Fama, 1970), which jointly explain how publicly available, economically relevant information is processed by investors and reflected in security prices. Using a quantitative approach and secondary data drawn from annual reports, financial statements, and daily stock prices of manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the 2020–2024 period, purposive sampling yielded 1,074 firm-year observations. Market reaction is proxied by Cumulative Abnormal Return (CAR) computed with a market-adjusted model over a six-day event window. Managerial ability is estimated through a two-stage Data Envelopment Analysis (DEA)–Tobit procedure following Demerjian and McVay (2012), earnings announcement tone is measured through textual analysis of positive and negative words using the Loughran–McDonald financial sentiment dictionary, and digital transformation is captured through a ten-item Digital Disclosure Index (DDI) derived from annual report content analysis. Hypotheses are tested with Moderated Regression Analysis (MRA). The results show that managerial ability and digital transformation each have a positive and significant direct effect on market reaction, whereas earnings announcement tone has no significant effect. Digital transformation is not found to moderate either the managerial ability–market reaction relationship or the tone–market reaction relationship. These findings suggest that Indonesian investors treat managerial competence and digital readiness as independently valuable, verifiable signals, while narrative tone alone carries limited incremental information content, and that digital disclosure has not yet developed into a credibility-amplifying mechanism for other corporate signals. The study extends Signaling Theory and EMH to an emerging-market, post-pandemic digitalization context and offers practical implications for managers, investors, exchange regulators, and future researchers.