Aggregate Disclosure and Sentiment

Abstract

This paper examines the relationship between aggregate disclosure and investor expectations about the future economy (i.e. sentiment). I specifically explore the relationship between the aggregate tone of firm-level annual and quarterly reports and common investor sentiment measures. Controlling for a number of macroeconomic factors, I find that more negative aggregate tone is associated with less positive sentiment in future months. Consistent with the Barberis, Shleifer, and Vishny (1998) model of investor sentiment, I find that this result is stronger when the disclosure is more salient (i.e. lower tone dispersion) and is more statistically informative (i.e. higher filing intensity). I also find preliminary evidence suggesting that aggregate tone relates to both short-term and long-term expectations and that it associates more to the non-fundamental expectations of investors. Overall, the findings suggest accounting information may play a role in influencing investor expectations about the future economy.