Do managements tell us the whole truth and nothing but the truth? Impact of textual sentiment in financial disclosure to future firm performance and market response in Thailand

This paper empirically explores causal relation between financial news and stock price performance by applying textual analysis to listed firms' financial disclosure in Thailand. Managers generally use language in management discussion and analysis (MD%A) report to communicate value-relevant information to investors and other stakeholders. I applied a dictionary-based approach to extract textual sentiment. It is found that higher values of net textual sentiment predict higher future performance. Particularly, this study revealed that investors reacted to this kind of information asymmetrically. The effect of the unfavourable tone of financial disclosures on stock market price was more pronounced and had more predictive power than the favourable tone. Furthermore, I find that constructing portfolios that long top quintile and short bottom quintile of stock ranked by changes in tone could gain abnormal returns. Overall, this paper highlights the important role of non-financial statement disclosure in affecting future company performance and could be applied to other international stock markets.