Soft information in earnings announcements: news or noise?

By Elizabeth Demers, Clara Vega. 2008

214 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/cdfa9675a9bb30c648a49db03300c2926f7252da

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Citations in the corpus

The information content of central bank minutes (2012, unknown): “…ECB communication to develop an indicator of financial stress for the euro area; Born, Ehrmann and Fratzscher (2010), investigating the effects of central banks’ communication on financial stability issues; and Demers and Vega (2010), measuring the impact of earnings press releases on stock prices.”
Improving Sentiment Analysis with Document-Level Semantic Relationships from Rhetoric Discourse Structures (2017, background): “This approach is frequent in related works and has the advantage of performing well for financial communication and also yields robust results when dealing with fairly extensive documents [21].”
Earnings conference calls and stock returns: The incremental informativeness of textual tone (2012, unknown): “Overall, these studies (Davis et al., 2008; Demers and Vega, 2008; Henry, 2008; and Sadique et al., 2008) suggest that the information content of the words accompanying an earnings announcement provides additional insight beyond that which we learn by scrutinizing the numerical value of the earnings”
The Power of Voice: Managerial Affective States and Future Firm Performance (2012, background): “Only recently have researchers begun to explore the capital market implications of qualitative verbal communication via financial news stories (Tetlock, 2007; Tetlock, Saar-Tsechansky, and Macskassy, 2008), annual reports (Li, 2006; Loughran and McDonald 2009) conference presentations (Bushee, Jung ”
Textual Analysis of Corporate Disclosures: A Survey of the Literature (2011, background): “First, the level of optimism in earnings releases is positively associated with the market’s short-term response to the announcement [Henry, 2008; Demers and Vega, 2008; Davis, Piger, and Sedor, 2008] and a similar relation holds for 10-”
Processing Fluency and Investors’ Reactions to Disclosure Readability (2012, unknown): “…of 27 qualitative disclosures, stylistic factors besides readability have been investigated in the archival literature, including certainty (Demers and Vega 2010), numerical intensity (Henry 2008), boilerplate vs. meaningful language (Nelson and Pritchard 2007), and tone (Nelson and…”
Good debt or bad debt: Detecting semantic orientations in economic texts (2013, methodology): “It is also quite common to adopt an o ﬀ -the-shelf package such as Diction or Wordstat to perform dictionary-based searches for sentiment cues (Demers & Vega, 2008; Davis, Piger, & Sedor, 2007).”
The Role of Bank Monitoring in Borrowers’ Discretionary Disclosure: Evidence from Covenant Violations (2014, unknown): “with more precise information about the firm’s financial condition, but also enhances the credibility of the soft information contained in MD&As (Demers and Vega, 2010).”
A conceptual framework of impression management: new insights from psychology, sociology and critical perspectives (2011, background): “Demers and Vega (2010) find that investors disregard managerial optimism in earnings announcements, unless it is verified by outside sources such as financial analysts and the media, and it is accompanied by hard information.”
The Effect of Issuer Conservatism on IPO Pricing and Performance (2013, unknown): “The findings of this study add to the new and growing literature using textual analysis (e.g., Demers and Vega, 2008; Davis et al., 2008; Rogers et al., 2011; Doran et al., 2009) and have important implication regarding future research on new issues.”
How are shorts informed (2012, background): “While the literature finds that news events create trading opportunities for informed traders (see, e.g., Engelberg, 2008; Demers and Vega, 2008), other potential explanations exist.”
Management’s tone change, post earnings announcement drift and accruals (2010, unknown): “Demers and Vega (2007) extend the analysis in the Tetlock (2007) and Tetlock et al. (2008) by examining the incremental information content of sentiments expressed in " soft " or " verbal " text in voluntary, non-mandated management's quarterly press releases.”
The language of US corporate environmental disclosure (2010, methodology): “…environmental disclosures that received high and low DICTION ‘‘certainty” scores.3 We expect that corporations 3 As we discuss below, we follow Demers and Vega (2009) and calculate our ‘‘certainty” scores treating numerical terms as a positive, rather than negative adjustment to the…”