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Beyond the numbers: an analysis of optimistic and pessimistic language in earnings press releases

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  • Angela K. Davis
  • Jeremy M. Piger
  • Lisa M. Sedor

Abstract

In this paper, we examine whether managers use optimistic and pessimistic language in earnings press releases to provide information about expected future firm performance to the market, and whether the market responds to optimistic and pessimistic language usage in earnings press releases after controlling for the earnings surprise and other factors likely to influence the market*s response to the earnings announcement. We use textual-analysis software to measure levels of optimistic and pessimistic language for a sample of approximately 24,000 earnings press releases issued between 1998 and 2003. We find a positive (negative) association between optimistic (pessimistic) language usage and future firm performance and a significant incremental market response to optimistic and pessimistic language usage in earnings press releases. Results suggest managers use optimistic and pessimistic language to provide credible information about expected future firm performance to the market, and that the market responds to managers' language usage.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-005.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2006-005

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Keywords: Accounting;

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  1. Gregory S. Miller, 2002. "Earnings Performance and Discretionary Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 173-204, 03.
  2. Frost, Carol A., 1997. "Disclosure policy choices of UK firms receiving modified audit reports," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 163-187, July.
  3. Michelle Bligh & Gregory D. Hess, 2006. "A Quantitive Assessment of the Qualitative Aspects of Chairman Greenspan's Communications," Computing in Economics and Finance 2006 213, Society for Computational Economics.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
  6. Stephen P. Baginski & John M. Hassell & Michael D. Kimbrough, 2004. "Why Do Managers Explain Their Earnings Forecasts?," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 1-29, 03.
  7. Amy P. Hutton & Gregory S. Miller & Douglas J. Skinner, 2003. "The Role of Supplementary Statements with Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 867-890, December.
  8. Baginski, Stephen P & Hassell, John M & Hillison, William A, 2000. " Voluntary Causal Disclosures: Tendencies and Capital Market Reaction," Review of Quantitative Finance and Accounting, Springer, vol. 15(4), pages 371-89, December.
  9. Wayne R. Landsman, 2002. "Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 797-808, 06.
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Cited by:
  1. Benjamin Born & Michael Ehrmann & Marcel Fratzscher, 2011. "Macroprudential policy and central bank communication," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 107-110 Bank for International Settlements.
  2. Michelle T. Armesto & Rubén Hernández-Murillo & Michael T. Owyang & Jeremy M. Piger, 2007. "Identifying asymmetry in the language of the Beige Book: a mixed data sampling approach," Working Papers 2007-010, Federal Reserve Bank of St. Louis.

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