Causal Language Intensity in Performance Commentary and Financial Analyst Behaviour

29 Pages Posted: 20 Feb 2019

See all articles by Shuyu Zhang

Shuyu Zhang

Zhongnan University of Economics and Law; Zhongnan University of Economics and Law

Walter Aerts

University of Antwerp

Huifeng Pan

University of International Business and Economics (UIBE)

Date Written: January/February 2019

Abstract

We use automated techniques to measure causal reasoning on earnings‐related financial outcomes of a large sample of MD&A sections of US firms and examine the intensity of causal language in that context against extent of analyst following and against properties of analysts’ earnings forecasts. We find a positive and significant association between a firm's causal reasoning intensity and analyst following and analyst earnings forecast accuracy respectively. Correspondingly, analysts’ earnings forecast dispersion is negatively and significantly associated with causal reasoning intensity. These results suggest that causal reasoning intensity provides incremental information about the relationship between financial performance outcomes and its causes, thereby reducing financial analysts’ information processing and interpreting costs and lowering overall analyst information uncertainty. Additionally, we find that decreases in analyst following are followed by more causal reasoning on performance disclosure. We also find that firms with a considerable increase of causal disclosure especially attract new analysts who already cover many firms. Overall, our evidence of the relationship between causal reasoning intensity and properties of analyst behaviour is consistent with the proposition that causal reasoning is a generic narrative disclosure quality characteristic, able to provide incremental information to analysts and guide analysts’ behaviour.

Keywords: accuracy, analyst following, causal reasoning, dispersion, narrative disclosure

Suggested Citation

Zhang, Shuyu and Aerts, Walter and Pan, Huifeng, Causal Language Intensity in Performance Commentary and Financial Analyst Behaviour (January/February 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 1-2, pp. 3-31, 2019. Available at SSRN: https://ssrn.com/abstract=3335338 or http://dx.doi.org/10.1111/jbfa.12351

Shuyu Zhang (Contact Author)

Zhongnan University of Economics and Law ( email )

No.143, Wuluo Road
Wuhan, Hubei 430073
China

Zhongnan University of Economics and Law ( email )

182 Nanhu Avenue
East Lake High-tech Development
Wuhan, HUBEI 100029
China

Walter Aerts

University of Antwerp ( email )

Prinsstraat 13
Antwerpen, B-2000
Belgium
003232654110 (Phone)
003232654064 (Fax)

Huifeng Pan

University of International Business and Economics (UIBE)

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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