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Soft information in earnings announcements: news or noise? (RV of 2008/44/AC/FIN)

Author: Demers, Elizabeth ; Vega, ClaraINSEAD Area: Accounting and Control Series: Working Paper ; 2010/33/AC (revised version of 2008/44/AC/FIN) Publisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 67 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper examines whether, and under what conditions, the 'soft' information contained in the text of management's quarterly earnings press releases is incrementally informative over company-issued 'hard' information. We use several textual-analysis programs to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and find that unanticipated net optimism in managers' language affects announcement period abnormal returns and predicts post-earnings announcement drift. We further find, consistent with economic theory, that two key aspects of the information environment influence the price-responsiveness to net optimism: (i) the informativeness of the contemporaneously available hard information; and (ii) the likely credibility of the net optimism itself. We also show that the second moment of soft information, the level of uncertainty in the text, attenuates the market's response to earnings announcement surprises, is associated with contemporaneous announcement period idiosyncratic volatility, and predicts future idiosyncratic volatility incrementally to 'hard' information. Previous title: Soft information in earnings announcements: news or noise? - Demers, Elizabeth;Vega, Clara - 2008 - INSEAD Working Paper
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This paper examines whether, and under what conditions, the 'soft' information contained in the text of management's quarterly earnings press releases is incrementally informative over company-issued 'hard' information. We use several textual-analysis programs to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and find that unanticipated net optimism in managers' language affects announcement period abnormal returns and predicts post-earnings announcement drift. We further find, consistent with economic theory, that two key aspects of the information environment influence the price-responsiveness to net optimism: (i) the informativeness of the contemporaneously available hard information; and (ii) the likely credibility of the net optimism itself. We also show that the second moment of soft information, the level of uncertainty in the text, attenuates the market's response to earnings announcement surprises, is associated with contemporaneous announcement period idiosyncratic volatility, and predicts future idiosyncratic volatility incrementally to 'hard' information.

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