Aligned and unique text in earnings reports predict stock returns
Measuring What is Repeated and Novel in Earnings Disclosures Using Optimal Transport
Computational Engineering, Finance, and Science
Summary
Companies share financial updates through press releases and conference calls. The authors developed a method to separate shared information from unique content in these documents. They found that the shared parts strongly explain stock price changes on announcement days, while unique content in conference calls, often about future plans, also predicts stock moves. Investors tend to react too much to shared news and miss some of the unique insights from calls after announcements.
What this means in practice
- •For investment analysts: Improve prediction of stock price movements by focusing on unique forward-looking content in conference call transcripts in addition to press releases.
- •For financial news aggregators: Develop tools to highlight novel information in earnings calls to provide more nuanced market insights than from press releases alone.$Commercial implications: Enables selling advanced news analysis features to investors and traders by identifying unique predictive content in earnings disclosures.
Authors
Yuntao Wu, Lynn Tao, Charles Martineau, Vincent Grégoire, Andreas Veneris
Abstract
We introduce an optimal transport framework to decompose the textual content of earnings press releases and conference calls into aligned (shared) and unaligned (unique) components, and use these as predictors of stock returns around earnings announcements. Using over 105,000 document pairs from 2008 to 2023, we find that the aligned portions of both disclosures explain announcement-day returns with high statistical significance. The unaligned component of conference calls, which captures forward-looking content absent from press releases, provides substantial incremental explanatory power, shedding light on why conference calls are central to market reactions to earnings news. Extending to post-announcement returns, investors appear to overreact to shared press release content while underreacting to the unique information conveyed in conference calls.