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Soft Information in Earnings Announcements: News or Noise?

Author

Listed:
  • Elizabeth Demers

    (INSEAD)

  • Clara Vega

    (Federal Reserve Board of Governors)

Abstract

This paper examines whether the “soft” information contained in the text of management’s quarterly earnings press releases is incrementally informative over the company’s reported “hard” earnings news. We use Diction, a textual-analysis program, to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers’ language affects announcement period abnormal returns and predicts post-earnings announcement drift. We find that it takes longer for the market to understand the implications of soft information than those of hard information. We also find that the market response varies by firm size, turnover, media and analyst coverage, and the extent to which the standard accounting model captures the underlying economics of the firm. We also show that the second moment of soft information, the level of certainty in the text, is an important determinant of contemporaneous idiosyncratic volatility, and it predicts future idiosyncratic volatility.

Suggested Citation

  • Elizabeth Demers & Clara Vega, 2009. "Soft Information in Earnings Announcements: News or Noise?," 2009 Meeting Papers 80, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:80
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    Cited by:

    1. Roman Frydman & Michael Goldberg & Nicholas Mangee, 2015. "New Evidence for the Present-Value Model of Stock Prices: Why the REH Version Failed Empirically," Working Papers Series 2, Institute for New Economic Thinking.
    2. Wisniewski, Tomasz Piotr & Yekini, Liafisu Sina, 2014. "Predicting Stock Market Returns Based on the Content of Annual Report Narrative: A New Anomaly," MPRA Paper 58107, University Library of Munich, Germany.
    3. Druz, Marina & Wagner, Alexander F. & Zeckhauser, Richard J., 2015. "Reading Managerial Tone: How Analysts and the Market Respond to Conference Calls," Working Paper Series 16-004, Harvard University, John F. Kennedy School of Government.
    4. Nicky J. Ferguson & Jie Michael Guo & Nicky Herbert Y.T. Lam & Dennis Philip, 2011. "Media Sentiment and UK Stock Returns," Working Papers 2011_06, Durham University Business School.
    5. Daniel J. Tulloch, Ivan Diaz-Rainey, and I.M. Premachandra, 2017. "The Impact of Liberalization and Environmental Policy on the Financial Returns of European Energy Utilities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    6. Marina Druz & Alexander F. Wagner & Richard J. Zeckhauser, 2015. "Tips and Tells from Managers: How Analysts and the Market Read Between the Lines of Conference Calls," NBER Working Papers 20991, National Bureau of Economic Research, Inc.
    7. Cho, Charles H. & Roberts, Robin W. & Patten, Dennis M., 2010. "The language of US corporate environmental disclosure," Accounting, Organizations and Society, Elsevier, vol. 35(4), pages 431-443, May.
    8. Jacob Boudoukh & Ronen Feldman & Shimon Kogan & Matthew Richardson, 2013. "Which News Moves Stock Prices? A Textual Analysis," NBER Working Papers 18725, National Bureau of Economic Research, Inc.
    9. Doris M. Merkl-Davies & Niamh M. Brennan, 2011. "A conceptual framework of impression management: new insights from psychology, sociology and critical perspectives," Accounting and Business Research, Taylor & Francis Journals, vol. 41(5), pages 415-437, December.
    10. Blau, Benjamin M. & Tew, Philip L., 2014. "Short sales and class-action lawsuits," Journal of Financial Markets, Elsevier, vol. 20(C), pages 79-100.
    11. Elizabeth Gordon & Elaine Henry & Marietta Peytcheva & Lili Sun, 2013. "Discretionary disclosure and the market reaction to restatements," Review of Quantitative Finance and Accounting, Springer, vol. 41(1), pages 75-110, July.
    12. Price, S. McKay & Doran, James S. & Peterson, David R. & Bliss, Barbara A., 2012. "Earnings conference calls and stock returns: The incremental informativeness of textual tone," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 992-1011.
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    14. YAN, Beibei & AERTS, Walter, 2014. "Rhetorical impression management in corporate narratives and institutional environment," Working Papers 2014014, University of Antwerp, Faculty of Applied Economics.
    15. David O. Lucca & Francesco Trebbi, 2009. "Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements," NBER Working Papers 15367, National Bureau of Economic Research, Inc.
    16. Chouliaras, Andreas, 2015. "The Pessimism Factor: SEC EDGAR Form 10-K Textual Analysis and Stock Returns," MPRA Paper 65585, University Library of Munich, Germany.
    17. Engelberg, Joseph E. & Reed, Adam V. & Ringgenberg, Matthew C., 2012. "How are shorts informed?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 260-278.

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