When Do Language Wrappers Matter? Market Reactions to Language Use in Earnings Announcements

Abstract

While the linkage between firms’ announcement of corporate quarterly earnings and stakeholder reactions has been widely studied, much less is known about the possible impact of adding specific language to those earnings numbers. We draw on research in organization theory and behavioral finance to advance an original perspective on the nature of the financial market response to language use. Specifically, we analyze theoretically and empirically how financial market participants are likely to respond to the use of positive tone, causal attribution and time orientation in corporate quarterly earnings announcements. We highlight markets’ differential response to language relative to both organizational performance and overall market sentiment. We test and find general support for our predictions on the value of language using extensive data on 648 quarterly earnings announcements from NASDAQ- listed firms in bull and bear markets (1999 and 2002).