Beyond the Numbers: Measuring the Information Content of Earnings Press Release Language

Earnings press releases are ‘‘the major news event of the season for many companies as well as investors, analysts, financial media, and the market’’ (Mahoney and Lewis 2004). The information content of earnings press releases has increased significantly over time (Kross and Kim 2000; Lo and Lys 2001; Francis, Schipper, and Vincent 2002a, 2002b; Landsman and Maydew 2002; Collins, Li, and Xie 2005) and has been accompanied by a corresponding increase in press release length. Specifically, the number of words used in earnings press releases increased approximately five times between 1980 and 1999 (Francis et al. 2002b). This trend continued over our sample period, with median earnings press release length increasing to more than 1,700 words by 2003, a greater than 90 percent increase from 1998. This dramatic increase in the sheer number of words used in earnings press releases suggests an important question: Does the language used throughout an earnings press release provide a signal regarding managers’ expectations about future performance? If so, does the market respond to this information? Earnings press releases are characterized as a disclosure mechanism revealing a ‘‘package of information’’ to investors (Francis et al. 2002b). An important element of this information package is language used in the earnings press release, which provides the unifying framework within which earnings are announced and other quantitative and qualitative disclosures are made. Prior research on earnings press releases examined the incremental information content of specific, qualitative disclosures like officers’ comments. For instance, officers’ comments communicating good and bad news about the future are informative above and beyond the announcement of earnings per se (Hoskin, Hughes, and Ricks 1986; Francis et al. 2002b). The information revealed to investors via earnings press release language, however, likely extends beyond specific officers’ comments. Consistent with this proposition, promotional language in press releases (including, but not limited to, earnings press releases) is observed not only in officer comments, but also in the more prevalent, nonquotation sections of the release (Maat 2007). We argue that managers use language throughout an earnings press release to signal, both directly and more subtly, their expectations about future performance. Managers’ earnings press release language varies significantly across firms and ranges from straightforward to promotional (Mahoney and Lewis 2004). Managers generally report financial performance in comparative terms, and so we expect managers’ earnings press release