Beyond the Numbers: Measuring the Information Content of Earnings Press Release Language

Earnings press releases are the primary mechanism by which managers announce quarterly earnings and make other concurrent disclosures to investors and other stakeholders. A largely unexplored element of earnings press releases is the language that managers use throughout the press release, which we...

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Bibliographic Details
Published in:Contemporary accounting research 2012-09, Vol.29 (3), p.845-868
Main Authors: Davis, Angela K., Piger, Jeremy M., Sedor, Lisa M.
Format: Article
Language:English
Subjects:
Earnings
Earnings announcements
Forecasting techniques
Investment analysis
Language
Managers
Market
Personal finance
Press releases
Public relations
Stakeholder
Studies
U.S.A
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Summary:Earnings press releases are the primary mechanism by which managers announce quarterly earnings and make other concurrent disclosures to investors and other stakeholders. A largely unexplored element of earnings press releases is the language that managers use throughout the press release, which we argue provides a unifying framework for these disclosures and an opportunity for managers to signal, both directly and more subtly, their expectations about future performance. We analyze the full texts of approximately 23,000 earnings press releases issued between 1998 and 2003 and examine whether the language used in these earnings press releases provides a signal about expected future firm performance and whether the market responds to this signal. Using categories derived from linguistic theory, we count words characterized as optimistic and pessimistic and construct a measure of managers' net optimistic language for each earnings press release. We find that this measure is positively associated with future return on assets and generates a significant market response in a short window around the earnings announcement date. We include in our models the earnings surprise as well as other quantifiable, concurrent disclosures identified in prior research as associated with the market's reaction to earnings press releases. Our results support the premise that earnings press release language provides a signal regarding managers' future earnings expectations to the market and that the market responds to this signal. We interpret our evidence to suggest that managers use language in earnings press releases to communicate credible information about expected future firm performance. [PUBLICATION ABSTRACT]
ISSN:0823-9150
1911-3846
DOI:10.1111/j.1911-3846.2011.01130.x