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More Than Words: Quantifying Language to Measure Firms' Fundamentals

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  • PAUL C. TETLOCK
  • MAYTAL SAAR‐TSECHANSKY
  • SOFUS MACSKASSY

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 into stock prices.

Suggested Citation

  • Paul C. Tetlock & Maytal Saar‐Tsechansky & Sofus Macskassy, 2008. "More Than Words: Quantifying Language to Measure Firms' Fundamentals," Journal of Finance, American Finance Association, vol. 63(3), pages 1437-1467, June.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:3:p:1437-1467
    DOI: 10.1111/j.1540-6261.2008.01362.x
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