Some People Say: Linguistic Imprecision in Corporate Disclosures
55 Pages Posted: 3 Apr 2018 Last revised: 25 Sep 2018
Date Written: August 30, 2018
We develop a measure of linguistic imprecision using sentences marked with the “weasel tag” on Wikipedia, which is used to identify vague and unverifiable information. Linguistic imprecision is positively associated with uncertainty, but is distinct from notable uncertainty measures (i.e., textual measures of uncertainty of weak modal words). Managers use imprecise language in their 10-K disclosures when their firms face product market threats or greater financial constraints in equity markets. In addition, managers employ greater linguistic imprecision during periods of low and declining profitability. Consistent with linguistic imprecision capturing managerial information on upcoming positive but yet uncertain prospects, firms that employ high linguistic imprecision exhibit significantly higher subsequent abnormal returns. In addition, firms with high linguistic imprecision subsequently experience greater upside return volatility than otherwise similar firms, and invest more, particularly in intangible investments such as R&D. Collectively, these findings suggest that corporate disclosures with linguistic imprecision can convey value-relevant information.
Keywords: Textual analysis, 10K filings, Wikipedia, Weasel words, Linguistic Imprecision, Product markets, Financial constraints
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