A textual analysis of financial disclosure; evidence from the Stock Exchange Of Thailand

Abstract

This paper empirically explores causal relation between non-financial information and stock price performance by applying textual analysis to listed firms’ financial disclosure in Thailand. Managers generally use language in Management Discussion & Analysis (MD&A) report to communicate value-relevant information to investors and other stakeholders. I applied various kinds of approach to quantify qualitative information. I found that, on average, management discussion reports four main topics, which are financial performance, financial status, external factor and industry specific topic. The result shows that managements discuss more proportion on financial performance topic with more positive net tone, when future ROA is increasing. Additionally, they tend to use ambiguous language in financial status topic, when managements expect firms’ profitability to show an upward trend. More importantly, the result shows that investors place greater value on management tone in other topics rather than tone in financial performance. Particularly, this study revealed that investors reacted to this kind of information asymmetrically. The effect of the unfavorable tone of financial disclosures on stock market price was more pronounced and had more predictive power than the favorable tone. Finally, I found that net tones in MD&A report contain the critical information in predicting the stock return volatility.