QuantPapers

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.

Quantifying Language to Measure Firms’ Fundamentals