More than Words: Quantifying Language to Measure Firms' Fundamentals

Tetlock, Paul C.; Saar-Tsechansky, Maytal; Macskassy, Sofus

doi:10.2139/ssrn.923911

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More than Words: Quantifying Language to Measure Firms' Fundamentals

9th Annual Texas Finance Festival

48 Pages Posted: 13 Aug 2006

See all articles by Paul C. Tetlock

Sofus Macskassy

Fetch Technologies, Inc

Date Written: May 2007

Abstract

We examine whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) firms' stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms' fundamentals, which investors quickly incorporate in stock prices.

Keywords: Market Efficiency, Underreaction, News Media, Qualitative Information, Language

JEL Classification: G12, G14, M41

Suggested Citation: Suggested Citation

Tetlock, Paul C. and Saar-Tsechansky, Maytal and Macskassy, Sofus, More than Words: Quantifying Language to Measure Firms' Fundamentals (May 2007). 9th Annual Texas Finance Festival, Available at SSRN: https://ssrn.com/abstract=923911 or http://dx.doi.org/10.2139/ssrn.923911