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When is a Liability not a Liability? Textual Analysis, Dictionaries, and 10-Ks

46 Pages Posted: 23 Jan 2009 Last revised: 5 Mar 2010

Tim Loughran

University of Notre Dame

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance

Date Written: March 4, 2010

Abstract

Previous research uses negative word counts to measure the tone of a text. We show that word lists developed for other disciplines misclassify common words in financial text. In a large sample of 10 Ks during 1994 to 2008, almost three-fourths of the words identified as negative by the widely used Harvard Dictionary are words typically not considered negative in financial contexts. We develop an alternative negative word list, along with five other word lists, that better reflect tone in financial text. We link the word lists to 10 K filing returns, trading volume, return volatility, fraud, material weakness, and unexpected earnings.

Keywords: Textual analysis, Harvard Dictionary, negative word counts, term weighting

JEL Classification: G10, G14

Suggested Citation

Loughran, Tim and McDonald, Bill, When is a Liability not a Liability? Textual Analysis, Dictionaries, and 10-Ks (March 4, 2010). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1331573

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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