Understanding the Role of Language in Management Forecast Press Releases
INSEAD Working Paper 2011/28/AC
Using a sample of 2,254 voluntarily-provided “unbundled” management earnings forecast press releases, we investigate the role of linguistic sentiment and linguistic certainty in pricing. We provide evidence that sentiment in the forecast setting is directionally consistent with the simultaneously issued hard earnings forecast and plays a significantly greater role in the context of unstructured managerial forecasts than in the earnings announcement setting. We document that sentiment is less important when historical earnings are more informative for valuation, and that the pricing of sentiment varies with forecast specific characteristics of the accompanying hard news that are unique to the management forecast setting (forecast rounding and timeliness). We further document that, similar to the pricing of earnings, the pricing of sentiment is attenuated in the cross-section by a stronger pre-disclosure information environment, differential (s-curve) pricing of larger absolute magnitudes of sentiment, and by higher capitalization rates. Investigating sentiment’s relation with the second moment of returns, we find that negative sentiment is associated with higher stock return volatility and greater dispersion in analyst forecasts, incremental to the magnitude of the sentiment and hard news surprise, and we find some evidence that more certain language is associated with lower idiosyncratic volatility and a reduction in dispersion. Finally, we find that negative sentiment is delayed, incremental to the delay of hard forecast bad news that has been documented in prior research.