Speculative and Informative: Lessons from Market Reactions to Speculation Cues

Abstract

Speculative language in corporate disclosures can convey valuable information on firms’ fundamentals. We evaluate this idea by developing a measure for speculative statements based on sentences marked with the "weasel tag” on Wikipedia. In the 16-week test period after filing, greater use of speculative statements in 10-Ks predicts positive and non-reverting abnormal returns, improvements to stock liquidity, more insider and informed buying, and more positive news sentiment. These findings are driven by disclosures that are more forward-looking and contain more R&D terms. These findings imply that manager usage of speculative language tends to reflect voluntary disclosure of private information, which reveals positive but uncertain future events.

Keywords: Textual Analysis, 10-K Filings, Wikipedia, Weasel Words, Speculative language, Market Reactions, Information Asymmetry, Informed Trading Activity, News Sentiment