Information Disclosure and Stock Returns

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Chicago Ballroom VIII
Hosted By: American Finance Association
  • Chair: Dong Lou, London School of Economics and Political Science

Good News in Numbers

Dexin Zhou
,
Baruch College

Abstract

This paper investigates the ratio of quantitative and qualitative content in disclosure and finds that the proportion of qualitative and quantitative information in disclosures contains value-relevant information for investors, since executives tend to use qualitative information, which is less precise, to obscure their bad performance. I calculate the proportion of numbers to words in conference call transcripts as a proxy for the proportion of quantitative information. Using this measure, I find that the proportion of quantitative information is positively related to operating and financial performance. I also find that managers are more likely to talk up their performances when using lower proportion of quantitative information. In addition, a high proportion of quantitative information is associated with a more positive stock price reaction, suggesting that a high proportion of quantitative information also conveys positive information about the firm. Finally, investors do not fully incorporate this information in the stock prices. A high proportion of quantitative information predicts a positive drift in stock returns after the conference call date.

In No (Un-)Certain Terms: Managerial Style in Communicating Earnings News

Michal Dzielinski
,
Stockholm University
Alexander F. Wagner
,
Swiss Finance Institute and University of Zurich
Richard Zeckhauser
,
Harvard University

Abstract

Managers display distinctive word choice styles when they conduct earnings conference calls. Some CEOs and CFOs are straight talkers. Others, by contrast, are vague talkers. Vague talkers routinely use words such as "approximately", "probably", or "maybe". Analysts and the stock market attend to the style of managerial talk. They find earnings news less informative when managers are vague and respond less and more slowly as a result. Overall, quantitative information and straightforward contextual information are complements. Large fi rms with vague managers receive lower valuations relative to their book value.

Complexity and Information Content of Financial Disclosures: Evidence From Evolution of Uncertainty Following 10-K Filings

Frederico Belo
,
University of Minnesota
Jun Li
,
University of Texas-Dallas
Xiaoji Lin
,
Ohio State University
Xiaofei Zhao
,
University of Texas-Dallas

Abstract

We document two novel findings on the evolution of uncertainty following 10-K filings. First, we find a hump-shaped volatility dynamics for an average firm: following 10-K filings, its volatility increases by 0.36% in the first two to four weeks followed by a 2.55% decrease in the subsequent six weeks. Second and more importantly, this hump-shaped dynamics is more pronounced for firms with larger 10-K file sizes – a recent measure for complexity of financial disclosures. The economic impact of our findings is nontrivial: an options strategy based on this volatility pattern delivers up to 17.3% cross-sectional difference in annualized returns between firms with large and small 10-K file sizes. Our findings therefore highlight two opposing effects of information disclosures on the evolution of uncertainty along the time dimension: While a more complex disclosure is associated with a higher level of uncertainty in the short horizon, its information content can result in an eventual resolution of uncertainty once the information is digested by investors.

What Do Measures of Real-Time Corporate Sales Tell Us About Earnings Surprises and Post-Announcement Returns?

Kenneth Froot
,
Harvard Business School
Namho Kang
,
University of Connecticut
Gideon Ozik
,
EDHEC Business School
Ronnie Sadka
,
Boston College

Abstract

We develop real-time proxies of retail corporate sales from multiple sources, including ~50 million mobile devices. These measures contain information from both the earnings quarter (“within quarter”) and the period between that quarter’s end and the earnings announcement date (“post quarter”). Our within-quarter measure is powerful in explaining quarterly sales growth, revenue surprises and earnings surprises, generating average excess announcement returns of 3.4%. However, surprisingly, our post-quarter measure is related negatively to announcement returns, and positively to post-announcement returns. When post-quarter private information is positive, managers, at announcement, provide pessimistic guidance and use negative language. This effect is more pronounced when, post-announcement, management insiders trade. We conclude managers do not fully disclose their private information and instead bias their disclosures down when in possession of positive private information. The data suggest they may be motivated in part by subsequent personal stock-trading opportunities.
Discussant(s)
Huaizhi Chen
,
London School of Economics and Political Science
David Solomon
,
University of Southern California
Shiyang Huang
,
University of Hong Kong
Marina Niessner
,
Yale University
JEL Classifications
  • G3 - Corporate Finance and Governance