Comparative analysis of textual-content in corporate financial disclosures and implications on future stock return

Abstract

The objective of this thesis is to investigate the extent to which year-over-year changes in textual-content and structure in quarterly and annual financial disclosures across companies listed at Norwegian Stock Exchange may provide valuable information associated with future returns. Specifically, we seek to provide insights into the usefulness of the text-based financial analysis of annual and quarterly reports to companies’ outsiders. This paper contributes to an increased understanding of the informational value of the narrative sections of financial disclosures, investigating the usefulness of textual information to investors. We find that substantial changes to the textual content of corporate financial disclosures are associated with lower returns in the following three-month period. We also find that increased use of words related to negative sentiment (tone of language) is also associated with lower returns. Exploring a possible mechanism of what is causing the change in disclosures to indicate lower returns, we find a plausible explanation where negative sentiment in the disclosures is positively associated with the increased change to textual content.