Word Power: Content Analysis in the Presence of Competing Information

34 Pages Posted: 29 Jan 2019

See all articles by Tobias Lorsbach

Tobias Lorsbach

University of Cologne - Cologne Graduate School in Management, Economics and Social Sciences

Date Written: January 15, 2019

Abstract

Earnings announcements are the first notice of a firm’s financial performance and preempt the informational value of subsequent 10-K filings. This study evaluates tone measures that use earnings announcement returns or 10-K filing returns to interpret the relative strength of positive and negative words used in annual reports. I find that market reaction to earnings announcements are more informative than 10-K filing returns, and as these filing returns misclassify the relative strengths of words and consequentially tone measures. Market reaction to earnings announcements allows quantifying tone and elaborating the interpretation of financial language use better. In fact, my approach yields stronger correlation of qualitative information to first and second moments of stock returns, that is, future returns and volatility, and future profitability.

Keywords: textual analysis; tone; earnings announcements

JEL Classification: G14, G19, G30, M40, M41

Suggested Citation

Lorsbach, Tobias, Word Power: Content Analysis in the Presence of Competing Information (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3316089 or http://dx.doi.org/10.2139/ssrn.3316089

Tobias Lorsbach (Contact Author)

University of Cologne - Cologne Graduate School in Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, 50931
Germany

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