Discourse Uncertainty and Belief Polarization in Financial Markets: Evidence from Equity Analysts

56 Pages Posted: 28 Jul 2022

See all articles by Kai Du

Kai Du

Pennsylvania State University

Phong Truong

Pennsylvania State University

Date Written: July 1, 2022

Abstract

An important determinant of belief polarization is the different interpretations of the same information. We examine whether discourse uncertainty in corporate disclosures, an important driver of differential interpretations, leads to polarization in financial markets. Using a novel measure of discourse uncertainty derived from the computational linguistics literature, we find that discourse uncertainty intensifies analysts’ tendency to interpret information in the direction of their prior beliefs. Consistent with theories of bounded rationality and behavioral biases, the effect is more pronounced when analysts follow more firms, have less experience, and process lengthier 10-K. At the firm level, discourse uncertainty is positively associated with forecast distributions that are more dispersed and exhibit stronger bimodal patterns, consistent with belief polarization. Our findings shed light on characteristics of qualitative information that may give rise to belief polarization.

Keywords: Belief polarization; discourse uncertainty; analysts; earnings forecasts

JEL Classification: D80; G14; G24; G41; M41

Suggested Citation

Du, Kai and Truong, Phong, Discourse Uncertainty and Belief Polarization in Financial Markets: Evidence from Equity Analysts (July 1, 2022). Available at SSRN: https://ssrn.com/abstract=4152538 or http://dx.doi.org/10.2139/ssrn.4152538

Kai Du (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802
United States

Phong Truong

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States
16802 (Fax)

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