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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. Copyright (c) 2008 by The American Finance Association.

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
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