Soft Information in Earnings Announcements: News or Noise?
Elizabeth A. Demers
University of Virginia - Darden School of Business
Board of Governors of the Federal Reserve System
May 11, 2010
INSEAD Working Paper No. 2010/33/AC
This paper examines whether, and under what conditions, the “soft” information contained in the text of management’s quarterly earnings press releases is incrementally informative over company-issued “hard” information. We use several textual-analysis programs to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers’ language affects announcement period abnormal returns and predicts post-earnings announcement drift. We further find, consistent with economic theory, that two key aspects of the information environment influence the price-responsiveness to net optimism: (i) the informativeness of the contemporaneously available hard information; and (ii) the likely credibility of the net optimism itself. We also show that the second moment of soft information, the level of uncertainty in the text, attenuates the market’s response to earnings announcement surprises, is associated with contemporaneous announcement period idiosyncratic volatility, and predicts future idiosyncratic volatility incrementally to “hard” information.
Number of Pages in PDF File: 70
Keywords: Soft Information, Earnings Announcements, Post-earnings Drift, Cheap Talk, Languge Tone, Earnings Quality, Information Uncertainty, Momentum, Voluntary Disclosure
JEL Classification: M41, M45, G14, G29, D82working papers series
Date posted: June 30, 2008 ; Last revised: May 11, 2010
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