Qualitative Fundamentals in Earnings Press Releases

• In Event: Accruals and Earnings Quality

Abstract

Using a new approach to extract qualitative information, I re-examine the information content of earnings press releases. My analysis distinguishes between qualitative fundamentals (QLF), which largely describes fundamental events, and tone, which captures managers’ subjective net optimism and is the focus of prior research. I find that QLF incrementally positively predicts future cash flows, unlike tone, which incrementally negatively predicts future cash flows. Furthermore, QLF incrementally explains more than seven times the variation in future cash flows compared to tone. QLF also generates a smaller contemporaneous market reaction and a substantially larger and more persistent price drift relative to unexpected earnings. Collectively, my findings suggest that earnings press releases do not merely obfuscate; they provide substantial but hard-to-extract information about future cash flows.

Author

• Ken Li, Stanford University