The power of language in corporate financial reports

Abstract

Financial information is extremely valuable to investors and other interested parties. This information, which can be qualitative or quantitative in nature, can be analyzed and subsequently used to try to predict future share prices and/or determine market sentiment. Financial writers need to bear this in mind when writing reports, as their message(s) could be interpreted in unexpected ways and this could cause undesirable market reactions. In this article, I provide an overview of some studies that examined the writing style and tone of financial reports. I also provide an overview of some studies that examined the use of positive and negative words in financial reports. I conclude with reference to some recent studies that involved the automatic analysis and classification of financial content. Whilst the success of automated tools has been limited, to a certain extent, tools are being used increasingly to assist with the daunting task of interpreting complicated and lengthy financial documents. Once these tools improve, it will not be so easy for financial writers to disguise bad news in the midst of good news.