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Stock market returns and the content of annual report narratives

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  • Tomasz Piotr Wisniewski
  • Liafisu Sina Yekini

Abstract

This paper uses the tools of computational linguistics to analyze the qualitative part of annual reports of UK listed companies. More specifically, the frequency of words associated with different language indicators is used to forecast future stock returns. We find that two of these indicators, capturing ‘activity’ and ‘realism’, predict subsequent price increases, even after controlling for a wide range of factors. Elevated values of these two linguistic variables, however, are not symptomatic of exacerbated risk. Consequently, investors are advised to peruse annual report narratives, as they contain valuable information that may not yet have been discounted in the prices.

Suggested Citation

  • Tomasz Piotr Wisniewski & Liafisu Sina Yekini, 2015. "Stock market returns and the content of annual report narratives," Accounting Forum, Taylor & Francis Journals, vol. 39(4), pages 281-294, December.
    • Handle: RePEc:taf:accfor:v:39:y:2015:i:4:p:281-294
    DOI: 10.1016/j.accfor.2015.09.001
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    Cited by:

    1. Jirka Konietzny, 2017. "No risk, no fun: implications for positioning of online casinos," International Gambling Studies, Taylor & Francis Journals, vol. 17(1), pages 144-159, January.
    2. Fedorova, E. & Afanasev, D. & Nersesyan, R. & Ledyaeva, S., 2020. "Impact of non-financial information on key financial indicators of Russian companies," Journal of the New Economic Association, New Economic Association, vol. 46(2), pages 73-96.
    3. Elshandidy, Tamer & Kamel, Hany, 2024. "Tone of narrative disclosures and earnings management: UK evidence," Advances in accounting, Elsevier, vol. 64(C).
    4. Hesham Bassyouny & Tarek Abdelfattah, 2022. "Executives vs. governance: Who has the predictive power? Evidence from narrative tone," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 361-382, January.
    5. Edward J. Lusk & Michael Halperin, 2016. "A Linguistic Examination of the CapitalCubeâ„¢ Market Effect Variables," Accounting and Finance Research, Sciedu Press, vol. 5(2), pages 1-89, May.
    6. Chen, Yuh-Jen & Wu, Chun-Han & Chen, Yuh-Min & Li, Hsin-Ying & Chen, Huei-Kuen, 2017. "Enhancement of fraud detection for narratives in annual reports," International Journal of Accounting Information Systems, Elsevier, vol. 26(C), pages 32-45.
    7. Bassyouny, Hesham & Abdelfattah, Tarek & Tao, Lei, 2020. "Beyond narrative disclosure tone: The upper echelons theory perspective," International Review of Financial Analysis, Elsevier, vol. 70(C).
    8. Figlioli, Bruno & Lemes, Sirlei & Lima, Fabiano Guasti, 2020. "In search for good news: The relationship between accounting information, bounded rationality and hard-to-value stocks," Emerging Markets Review, Elsevier, vol. 44(C).
    9. Bassyouny, Hesham & Abdelfattah, Tarek & Tao, Lei, 2022. "Narrative disclosure tone: A review and areas for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).

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