EconPapers    
Economics at your fingertips  
 

Linguistic tone and the small trader

Stephen P. Baginski, Elizabeth Demers, Asad Kausar and Yingri Julia Yu

Accounting, Organizations and Society, 2018, vol. 68-69, 21-37

Abstract: Management-issued linguistic tone is, on average, positively associated with future earnings and incrementally priced by the market. However, prior capital markets research also shows that linguistic tone is difficult to process, while lab-based findings establish that less sophisticated investors are more susceptible to the use of heuristics in their interpretation of tone. Taken together, these findings motivate us to examine whether investors disagree on the valuation implications of linguistic tone and whether small investors are subject to differential, and notably less efficient, trading in response to the linguistic tone in these corporate announcements. We measure “residual tone” (i.e., that portion of linguistic tone that is not associated with contemporaneous economic news or current valuation fundamentals) for a sample of publicly-released management forecasts. We find that abnormal trading volume is increasing in the residual tone of management forecasts after controlling for the price reaction to forecasts, suggesting that there is significant investor disagreement over the implication of this tone for firm value. Further tests show that the net buying behavior of small investors is positively associated with residual tone, while larger investors tend to sell on this signal. The negative relation between residual tone and future stock returns found in prior work on earnings announcements holds in our sample of management forecasts as well, implying that this differential buying behavior involves an economically significant wealth transfer from small to large investors. We show in an extended analysis that any success that might accrue to small investors from trading positions taken during the event period is decreasing in residual tone.

Keywords: Linguistic tone; Investor disagreement; Information processing skills; Cheap talk; Optimism; Small trader; Voluntary disclosure; Behavioral finance; Management forecast (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0361368218300849
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:aosoci:v:68-69:y:2018:i::p:21-37

Access Statistics for this article

Accounting, Organizations and Society is currently edited by Christopher Chapman

More articles in Accounting, Organizations and Society from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2018-11-03
Handle: RePEc:eee:aosoci:v:68-69:y:2018:i::p:21-37