Uncertain Text and Stock Price Response to Earnings

Abstract

This study examines whether uncertain language in regulatory filings explains the stock price response to new information. The immediate stock price reaction to earnings is higher in firms having more uncertain text in prior 10-Q or 10-K filings. Stronger initial reaction suggests that uncertain text captures fundamental uncertainty rather than informational uncertainty. However, Post-Earnings Announcement Drift is stronger (weaker) in low-uncertainty (high-uncertainty) firms. The results also indicate that the immediate and delayed stock reaction are driven by the aggregate component of uncertain text. Overall, the findings are consistent with attention-constrained investors paying more attention to high-uncertainty firms, leading to lower attention and larger underreaction in low-uncertainty firms.

Keywords: Uncertain text, fundamental uncertainty, bounded rationality, limited attention, textual analysis, Post-Earnings Announcement Drift JEL classifications: G10

JEL Classification: G02, G12, G14