Beyond the Numbers: Measuring the Information Content of Earnings Press Release Language

31 Pages Posted: 16 Jan 2006 Last revised: 20 Jun 2011

Angela K. Davis

University of Oregon

Jeremy Piger

University of Oregon - Department of Economics

Lisa M. Sedor

DePaul University

Date Written: June 1, 2011

Abstract

Earnings press releases are the primary mechanism by which managers announce quarterly earnings and make other concurrent disclosures to investors and other stakeholders. A largely unexplored element of earnings press releases is the language that managers use throughout the press release, which we argue provides a unifying framework for these disclosures and an opportunity for managers to signal, both directly and more subtly, their expectations about future performance. We analyze the full texts of approximately 23,000 earnings press releases issued between 1998 and 2003 and examine whether the language used in these earnings press releases provides a signal about expected future firm performance and whether the market responds to this signal. Using categories derived from linguistic theory, we count words characterized as optimistic and pessimistic and construct a measure of managers’ net optimistic language for each earnings press release. We find that this measure is positively associated with future ROA and generates a significant market response in a short window around the earnings announcement date. We include in our models the earnings surprise as well as other quantifiable, concurrent disclosures identified in prior research as associated with the market’s reaction to earnings press releases. Our results support the premise that earnings press release language provides a signal regarding managers’ future earnings expectations to the market and that the market responds to this signal. We interpret our evidence to suggest that managers use language in earnings press releases to communicate credible information about expected future firm performance.

Keywords: disclosure, earnings press release, language, tone

JEL Classification: M41, M45

Suggested Citation

Davis, Angela K. and Piger, Jeremy and Sedor, Lisa M., Beyond the Numbers: Measuring the Information Content of Earnings Press Release Language (June 1, 2011). AAA 2008 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=875399 or http://dx.doi.org/10.2139/ssrn.875399

Angela K. Davis (Contact Author)

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3210 (Phone)

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Lisa M. Sedor

DePaul University ( email )

Chicago, IL 60604
United States

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