Skip to main content
SpringerLink
Log in

Leveraging Textual Analyst Sentiment for Investment

  • Conference paper
  • First Online:
Enterprise Applications, Markets and Services in the Finance Industry (FinanceCom 2020)

Part of the book series: Lecture Notes in Business Information Processing ((LNBIP,volume 401))

  • 610 Accesses

Abstract

We document that the sentiment conveyed in texts of reports written by financial analysts is informative about both contemporaneous and future stock prices. By setting up a portfolio trading strategy exploiting textual sentiment in analyst reports, we show that it is possible to generate average monthly factor-adjusted returns of 0.7%. In this context, we find that the past price target forecasting abilities of brokerage firms have a positive effect on the predictability of returns using sentiment portfolio strategies. Overall, our results demonstrate that analysts provide valuable information for interpreting and predicting stock price movements in their textual reports. In contrast to existing research that utilizes quantitative analyst information or analyzes textual analyst data with a focus on event studies, we stand out by conducting an analysis at the calendar-year level to leverage on qualitative analyst report content. Most importantly, our results demonstrate that the financial sector still offers untapped potential for the inclusion of qualitative information that can be relevant for both research and practice.

Timo Schäfer thanks the efl – the Data Science Institute for financial support.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    We thank Kenneth French for providing data on stock market factors, available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

References

  1. Twedt, B., Rees, L.: Reading between the lines: an empirical examination of qualitative attributes of financial analysts’ reports. J. Account. Public Policy 31(1), 1–21 (2012)

    Article  Google Scholar 

  2. Huang, A.H., Zang, A.Y., Zheng, R.: Evidence on the information content of text in analyst reports. Acc. Rev. 89(6), 2151–2180 (2014)

    Article  Google Scholar 

  3. Huang, A.H., Lehavy, R., Zang, A.Y., Zheng, R.: Analyst information discovery and interpretation roles: a topic modeling approach. Manage. Sci. 64(6), 1–23 (2017)

    Google Scholar 

  4. Womack, K.L.: Do brokerage analysts’ recommendations have investment value? J. Financ. 51(1), 137–167 (1996)

    Article  Google Scholar 

  5. Ertimur, Y., Sunder, J., Sunder, S.V.: Measure for measure: the relation between forecast accuracy and recommendation profitability of analysts. J. Acc. Res. 45(3), 567–606 (2007)

    Article  Google Scholar 

  6. Bradshaw, M.T., Brown, L.D., Huang, K.: Do sell-side analysts exhibit differential target price forecasting ability? Rev. Acc. Stud. 18(4), 930–955 (2013)

    Article  Google Scholar 

  7. Carhart, M.M.: On persistence in mutual fund performance. J. Financ. 52(1), 57–82 (1997)

    Article  Google Scholar 

  8. Barber, B., Lehavy, R., McNichols, M., Trueman, B.: Can investors profit from the prophets? Security analyst recommendations and stock returns. J. Financ. 56(2), 531–563 (2001)

    Article  Google Scholar 

  9. Loh, R.K., Mian, G.M.: Do accurate earnings forecasts facilitate superior investment recommendations? J. Financ. Econ. 80(2), 455–483 (2006)

    Article  Google Scholar 

  10. Bradshaw, M.T.: How do analysts use their earnings forecasts in generating stock recommendations? Acc. Rev. 79(1), 25–50 (2004)

    Article  Google Scholar 

  11. Bradshaw, M.T.: Analysts’ forecasts: what do we know after decades of work? Available at SSRN 1880339 (2011)

    Google Scholar 

  12. Bradley, D., Clarke, J., Lee, S., Ornthanalai, C.: Are analysts’ recommendations informative? Intraday evidence on the impact of time stamp delays. J. Financ. 69(2), 645–673 (2014)

    Article  Google Scholar 

  13. Kerl, A.G., Walter, A.: Never judge a book by its cover: what security analysts have to say beyond recommendations. Fin. Markets. Portfolio Mgmt. 22(4), 289–321 (2008)

    Article  Google Scholar 

  14. Bellstam, G., Bhagat, S., Cookson, J.A.: A text-based analysis of corporate innovation. Manage. Sci. (2020, Forthcoming)

    Google Scholar 

  15. Antweiler, W., Frank, M.Z.: Is all that talk just noise? The information content of internet stock message boards. J. Financ. 59(3), 1259–1294 (2004)

    Article  Google Scholar 

  16. Tetlock, P.C.: Giving content to investor sentiment: the role of media in the stock market. J. Financ. 62(3), 1139–1168 (2007)

    Article  Google Scholar 

  17. Manela, A., Moreira, A.: News implied volatility and disaster concerns. J. Financ. Econ. 123(1), 137–162 (2017)

    Article  Google Scholar 

  18. Loughran, T., McDonald, B.: When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. J. Financ. 66(1), 35–65 (2011)

    Article  Google Scholar 

  19. Bilinski, P., Lyssimachou, D., Walker, M.: Target price accuracy: international evidence. Acc. Rev. 88(3), 825–851 (2012)

    Article  Google Scholar 

  20. Fama, E.F., French, K.R.: Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33, 3–56 (1993)

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Goettingen, Goettingen, Germany

    Matthias Palmer

  2. Goethe University Frankfurt, Frankfurt am Main, Germany

    Timo Schäfer

Authors
  1. Matthias Palmer
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Timo Schäfer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Matthias Palmer .

Editor information

Editors and Affiliations

  1. Goethe University Frankfurt, Frankfurt, Germany

    Benjamin Clapham

  2. Goethe University Frankfurt, Frankfurt, Germany

    Jascha-Alexander Koch

Appendix

Appendix

Table 6. Summary statistics on the analyst report sample. The report distance indicates the average number of days between analyst reports. The column brokers lists how many different brokers have published reports per company.
Full size table

Rights and permissions

Reprints and permissions

Copyright information

© 2020 Springer Nature Switzerland AG

About this paper

Check for updates. Verify currency and authenticity via CrossMark

Cite this paper

Palmer, M., Schäfer, T. (2020). Leveraging Textual Analyst Sentiment for Investment. In: Clapham, B., Koch, JA. (eds) Enterprise Applications, Markets and Services in the Finance Industry. FinanceCom 2020. Lecture Notes in Business Information Processing, vol 401. Springer, Cham. https://doi.org/10.1007/978-3-030-64466-6_4

Download citation

  • DOI: https://doi.org/10.1007/978-3-030-64466-6_4

  • Published:

  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-030-64465-9

  • Online ISBN: 978-3-030-64466-6

  • eBook Packages: Computer ScienceComputer Science (R0)

Publish with us

Policies and ethics

Search

Navigation