More than Words: Quantifying Language to Measure Firms' Fundamentals the Authors Are Grateful for Assiduous Research Assistance from Jie Cao and Shuming Liu. We Appreciate Helpful Comments From

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 into stock prices. Copyright (c) 2008 by The American Finance Association.

[1]  MONTHLY REVEW,et al.  FEDERAL RESERVE BANK OF ST. LOUIS , 1601 .

[2]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .

[3]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[4]  Willard Van Orman Quine,et al.  The Roots of Reference , 1974 .

[5]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[6]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[7]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[8]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[9]  Andrei Shleifer,et al.  Do Demand Curves for Stocks Slope Down , 1986 .

[10]  David D. Van Fleet,et al.  Comments from the Editor , 1987 .

[11]  Robert J. Shiller,et al.  Cointegration and Tests of Present Value Models , 1987, Journal of Political Economy.

[12]  J. Poterba,et al.  What moves stock prices? , 1988 .

[13]  M. Nerlove,et al.  Biases in dynamic models with fixed effects , 1988 .

[14]  R. Roll.  R-S1-2 , 1988 .

[15]  Victor L. Bernard,et al.  POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUM , 1989 .

[16]  Kenneth A. Froot.  Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data , 1989, Journal of Financial and Quantitative Analysis.

[17]  Richard H. Thaler,et al.  Do Security Analysts Overreact , 1990 .

[18]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[19]  Victor L. Bernard,et al.  Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior , 1992 .

[20]  Narasimhan Jegadeesh,et al.  Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency , 1993 .

[21]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[22]  Josef Lakonishok,et al.  Momentum Strategies , 1995 .

[23]  E. Fama.  Market Efficiency, Long-Term Returns, and Behavioral Finance , 1997 .

[24]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .

[25]  Kent D. Daniel,et al.  Measuring mutual fund performance with characteristic-based benchmarks , 1997 .

[26]  F. Eugene.  FAMA, . Market efficiency, long-term returns, and behavioral finance, Journal of Financial Economics . , 1998 .

[27]  Bryan E. Denham.  Analyzing Media Messages: Using Quantitative Content Analysis in Research , 1999 .

[28]  John C. Easterwood,et al.  Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism? , 1999 .

[29]  K. Vohs,et al.  Case Western Reserve University , 1990 .

[30]  W. S. Chan,et al.  Stock Price Reaction to News and No-News: Drift and Reversal after Headlines , 2001 .

[31]  Vijay Singal,et al.  Return predictability following large price changes and information releases , 2001 .

[32]  Werner Antweiler,et al.  Is All that Talk Just Noise? The Information Content of Internet Stock Message Boards , 2001 .

[33]  Edward B. Royzman,et al.  Negativity Bias, Negativity Dominance, and Contagion , 2001 .

[34]  Market Efficiency in Real-Time , 2002 .

[35]  Paul C. Tetlock.  Giving Content to Investor Sentiment: The Role of Media in the Stock Market , 2005, The Journal of Finance.

[36]  Feng Li.  Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports? , 2006 .

[37]  S. Ross.  Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports , 2006 .

[38]  Werner Antweiler,et al.  Do Us Stock Markets Typically Overreact to Corporate News Stories? , 2006 .

[39]  Jeremy Piger.  Is all that talk just noise , 2006 .

[40]  Jeremy Piger,et al.  Louis Working Paper Series Beyond the Numbers : An Analysis of Optimistic and Pessimistic Language in Earnings Press Releases , 2006 .

[41]  Mike Y. Chen,et al.  Yahoo! for Amazon: Sentiment Extraction from Small Talk on the Web , 2001 .

[42]  Shane A. Corwin,et al.  Limited Attention and the Allocation of Effort in Securities Trading , 2008 .