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TO MAKE PROFITABLE INVESTMENT DECISIONS, INVESTORS NEED TO ASSESS THE FINANCIAL FUTURE OF FIRMS. DUE TO INVESTORS’ LACK OF INTERNAL INFORMATION ABOUT THE FIRMS’ FUTURE PROSPECTS, THEY OFTEN HAVE TO RELY ON MANAGERS’ VERBAL STATEMENTS FOR THIS TASK. HOWEVER, AS MANAGERS MIGHT HAVE AN INCENTIVE TO PRESENT POSITIVELY BIASED INFORMATION, THE VALUE OF THEIR STATEMENTS FOR INVESTORS IS NOT CLEAR.
IN THIS REPORT, WE SHOW HOW TEXTUAL ANALYSIS TOOLS CAN BE USED TO ASSESS THE VALUE OF MANAGERS’ VERBAL STATEMENTS DURING EARNINGS CONFERENCE CALLS FOR INVESTORS. WE FIND THAT IN PARTICULAR MANAGERS’ NEGATIVE STATEMENTS SIGNI FICANTLY PREDICT LOWER FUTURE EARNINGS.
