Language Matters

Polonius: What do you read, my lord?
Hamlet: Words, words, words
— Hamlet: Act II, Scene 2

According to a recent academic paper, company press releases contain more information than we realize.
Three researchers (Angela K. Davis, Jeremy M. Piger and Jeremy M. Piger) took an interesting approach. They ignored the numbers and instead focused on the language contained in press releases. Using text-analysis software, they looked for optimistic and pessimistic language used in 24,000 press releases.
Optimistic language included words that conveyed praise, satisfaction or inspiration. This includes words like best, better, favorable, good, great, important, positive, profitable, strong and successful. Pessimistic words conveyed blame, hardship or denial (i.e., alarmed, burden, conflict, weakness, setback).
Their results show that language matters. It’s as if the companies are tipping their hands. According to the researchers’ (jargony) conclusion:

Taken as a whole, these results suggests that the optimistic and pessimistic language used in the narrative disclosures of earnings press releases contains information about future firm performance incremental to other factors that are commonly associated with future earnings. This result suggests that market participants consider optimistic and pessimistic language usage to be a credible (at least to some extent) source of information about managers’ future earnings expectations. Finally, the association between market returns and the unexpected portion of optimistic and pessimistic language is substantially stronger than the association between market returns and the expected portion of optimistic and pessimistic language. This result suggests that managers likely have reputations for routinely providing optimistic or pessimistic disclosures and that the market responds to language usage that differs from those initial expectations.

Interestingly, they also found that corporate press releases are getting longer. Click here to see the paper.
I double-checked Microsoft’s press release from yesterday, and it doesn’t contain a single negative word. These guys are good. In fact, at no point do they even say that Vista is being delayed.

Posted by on March 22nd, 2006 at 3:08 pm


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