Disclosure Sentiment: Machine Learning vs Dictionary Methods

Management Science, forthcoming

49 Pages Posted: 14 May 2021

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Jared N. Jennings

Washington University in St. Louis

Joshua A. Lee

Brigham Young University

Date Written: May 1, 2021

Abstract

We compare the ability of dictionary-based and machine-learning methods to capture disclosure sentiment at 10-K filing and conference call dates. Like Loughran and McDonald (2011), we use returns to assess sentiment. We find that measures based on machine learning offer a significant improvement in explanatory power over dictionary-based measures. Specifically, machine-learning measures explain returns at 10-K filing dates, while measures based on the Loughran and McDonald dictionary only explain returns at 10-K filing dates during the time period of their study. Moreover, at conference-call dates, machine-learning methods offer an improvement over the Loughran and McDonald dictionary method of a greater magnitude than the improvement of the Loughran and McDonald dictionary over the Harvard Psychosociological dictionary. We further find that the random forest regression tree method better captures disclosure sentiment than alternative algorithms, simplifying the application of the machine-learning approach. Overall, our results suggest that machine-learning methods offer an easily implementable, more powerful and reliable measure of disclosure sentiment than dictionary-based methods.

Keywords: Textual Analysis, Machine Learning, Disclosure, Conference Calls

JEL Classification: M40, M41

Suggested Citation

Frankel, Richard M. and Jennings, Jared N. and Lee, Joshua A., Disclosure Sentiment: Machine Learning vs Dictionary Methods (May 1, 2021). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3845780

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Jared N. Jennings (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Joshua A. Lee

Brigham Young University ( email )

United States
801-422-3154 (Phone)

HOME PAGE: http://https://marriottschool.byu.edu/directory/details?id=37414

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