Future Earnings Information in Business Text

Abstract

We show that measures of business text sentiment are highly affected by transitory events. These transitory events lead to a strong positive association between sentiment and contemporaneous earnings. However, the association between sentiment and future earnings is insignificant. We develop a quantification of business text that is less affected by transitory events and is therefore better suited for prediction. Applied to 10-K filings, our proposed measure is strongly associated with both contemporaneous and future earnings. Further, applied to earnings announcements, our measure is strongly associated with future returns. Other tests verify and confirm the value of our measurement approach.

Keywords: Textual analysis; Bag of words; Sentiment analysis; Information in business text

JEL Classification: D82, D83, G14, M40, M41