Previous research uses negative word counts to measure the tone of a text. We show that word lists developed for other disciplines misclassify common words in financial text. In a large sample of 10 Ks during 1994 to 2008, almost three-fourths of the words identified as negative by the widely used Harvard Dictionary are words typically not considered negative in financial contexts. We develop an alternative negative word list, along with five other word lists, that better reflect tone in financial text. We link the word lists to 10 K filing returns, trading volume, return volatility, fraud, material weakness, and unexpected earnings.

When is a Liability not a Liability? Textual Analysis, Dictionaries, and 10-Ks

Econometric policy evaluation: A critique

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 in stock prices.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID989602_code193383.pdf?abstractid=923911

More than Words: Quantifying Language to Measure Firms' Fundamentals

In this paper, we document a structural break in the volatility of U.S. GDP growth in the first quarter of 1984 and provide evidence that this break emanates from a reduction in the volatility of durable goods production. Further, the reduction in durables volatility corresponds to a decline in the share of durable goods accounted for by inventories. We find no evidence of increased stability in the nondurables, services or structures sectors of the economy. Our evidence is compatible with a scenario in which changes in inventory management techniques in the durable goods sector have reduced the variability of aggregate output.

/pdf/output-fluctuations-in-the-united-states-what-has-changed-2t2dyofzoa.pdf

Output Fluctuations in the United States: What Has Changed since the Early 1980's?

This paper examines the relationship between annual report readability and firm performance and earnings persistence. This is motivated by the Securities and Exchange Commission's plain English disclosure regulations that attempt to make corporate disclosures easier to read for ordinary investors. I measure the readability of public company annual reports using both the Fog Index from computational linguistics and the length of the document. I find that the annual reports of firms with lower earnings are harder to read (i.e., they have higher Fog and are longer). Moreover, the positive earnings of firms with annual reports that are easier to read are more persistent. This suggests that managers may be opportunistically choosing the readability of annual reports to hide adverse information from investors.

Annual Report Readability, Current Earnings, and Earnings Persistence

Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of covariates that are (or should be) included. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities are traditional gravity variables, cultural distance factors, parent-country per capita GDP, relative labor endowments, and regional trade agreements. Variables with little support for inclusion are multilateral trade openness, host country business costs, host-country infrastructure (including credit markets), and host-country institutions. Of particular note, our results suggest that many covariates found significant by previous studies are not robust.

Determinants of Foreign Direct Investment

We find evidence that inflation targeting (IT) plays a role in anchoring long-run inflation expectations and in reducing the intrinsic persistence of inflation. Over the period since 1994, private-sector long-run inflation forecasts for the United States and the euro area exhibit significant correlation with lagged inflation, whereas this correlation is largely absent for Australia, Canada, New Zealand, Sweden, and the United Kingdom, indicating that these five inflation targeters have been quite successful in delinking expectations from realized inflation. Furthermore, we show that the null hypothesis of a random walk in core CPI inflation can be clearly rejected for four of these five countries, but not for either the U.S. or the euro area. Finally, we provide some evidence concerning the initial effects of the adoption of IT in a number of emerging-market economies.

/pdf/the-macroeconomic-effects-of-inflation-targeting-3vqv1gwzo9.pdf

The Macroeconomic Effects of Inflation Targeting

Earnings press releases are ‘‘the major news event of the season for many companies as well as investors, analysts, financial media, and the market’’ (Mahoney and Lewis 2004). The information content of earnings press releases has increased significantly over time (Kross and Kim 2000; Lo and Lys 2001; Francis, Schipper, and Vincent 2002a, 2002b; Landsman and Maydew 2002; Collins, Li, and Xie 2005) and has been accompanied by a corresponding increase in press release length. Specifically, the number of words used in earnings press releases increased approximately five times between 1980 and 1999 (Francis et al. 2002b). This trend continued over our sample period, with median earnings press release length increasing to more than 1,700 words by 2003, a greater than 90 percent increase from 1998. This dramatic increase in the sheer number of words used in earnings press releases suggests an important question: Does the language used throughout an earnings press release provide a signal regarding managers’ expectations about future performance? If so, does the market respond to this information? Earnings press releases are characterized as a disclosure mechanism revealing a ‘‘package of information’’ to investors (Francis et al. 2002b). An important element of this information package is language used in the earnings press release, which provides the unifying framework within which earnings are announced and other quantitative and qualitative disclosures are made. Prior research on earnings press releases examined the incremental information content of specific, qualitative disclosures like officers’ comments. For instance, officers’ comments communicating good and bad news about the future are informative above and beyond the announcement of earnings per se (Hoskin, Hughes, and Ricks 1986; Francis et al. 2002b). The information revealed to investors via earnings press release language, however, likely extends beyond specific officers’ comments. Consistent with this proposition, promotional language in press releases (including, but not limited to, earnings press releases) is observed not only in officer comments, but also in the more prevalent, nonquotation sections of the release (Maat 2007). We argue that managers use language throughout an earnings press release to signal, both directly and more subtly, their expectations about future performance. Managers’ earnings press release language varies significantly across firms and ranges from straightforward to promotional (Mahoney and Lewis 2004). Managers generally report financial performance in comparative terms, and so we expect managers’ earnings press release

/pdf/beyond-the-numbers-measuring-the-information-content-of-1hbgw8ixi4.pdf

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

Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of included covariates. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities include traditional gravity variables, cultural distance factors, relative labour endowments and trade agreements. There is little support for multilateral trade openness, most host-country business costs, host-country infrastructure and host-country institutions. Our results suggest that many covariates found significant by previous studies are not robust.

/pdf/determinants-of-foreign-direct-investment-3esq8r4ojm.pdf

Determinants of foreign direct investment

Many empirical studies have indicated that inflation exhibits very high persistence throughout the post-war period in nearly every industrial economy. In this paper we challenge this conventional wisdom and instead argue that in many cases, high inflation persistence is an artifact of empirical techniques that fail to account for occasional shifts in the monetary policy regime. In particular, we estimate autoregressive models of inflation for twelve OECD countries over the period 1984-2004, and we then perform tests for the existence of a structural break at an unknown date. For eight of the twelve countries, we find strong evidence for a break in intercept in the late 1980s or early 1990s; furthermore, conditional on the break in intercept, each inflation measure generally exhibits much lower persistence. Evidently, high inflation persistence is not an inherent characteristic of industrial economies.

http://depts.washington.edu/sce2003/Papers/298.pdf

Jeremy M. Piger

Papers

Determinants of Foreign Direct Investment

The Macroeconomic Effects of Inflation Targeting

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

Determinants of foreign direct investment

Is Inflation Persistence Intrinsic in Industrial Economies