Abstract
We investigated the association between the tone of annual reports issued by a sample of listed Brazilian firms and market variables (abnormal returns, trading volume and price volatility). The tone was measured using sentiment analysis techniques (Liu et al., 2005; Liu, 2010). As in Loughran and McDonald (2011), we developed and used lists of positive, negative, litigious, uncertainty-related and modal words in Portuguese to assess the tone of annual reports. Using a sample of 829 annual reports from 1997 to 2009, we observed a weak association between the tone of annual reports and stock market variables in Brazil. Additionally, we considered a sub-sample prior to GAAP changes in Brazil (1997-2007) and our results are maintained. Contrary to other studies using data from the United States, we found that the tone of annual reports released by Brazilian firms is not conducive to estimating returns. Keywords : sentiment analysis, textual sentiment, positive words, negative words, annual reports.
Highlights
Investors rely on several sources to gather the information they need to estimate the firm’s prospects
We sought to develop a procedure based on natural language processing techniques to investigate the association between some selected market variables with negative news disclosed by listed Brazilian firms through their annual reports
Such endeavor requires the use of a Portuguese vocabulary, which led us to develop a set of word lists designed to measure the tone of financial texts
Summary
Investors rely on several sources to gather the information they need to estimate the firm’s prospects. Efficient firms’ valuation should be equal to the present value of future cash flows conditional on investors information set, which includes quantitative and qualitative information (Tetlock et al, 2008). A substantial body of research has focused on the impact of information that is quantitative in nature, such as accounting numbers, macroeconomic indicators, industry productivity and so on. Research efforts have focused on understanding the influence of textual information (qualitative) on investment decisions. Such narrative information broadly consists of accounts of activities and actions taken by firms, such as asset dispositions, new product development/launch, cost reduction efforts, etc.
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