The impact of textual characteristics of management letters on stock prices of Russian companies

Abstract

The paper examines how textual characteristics in management letters of Russian companies (content, readability and tonality of the text) influence the average annual stock price. It is assumed that the presence of non-financial business information in the text (investment motivation, human capital, long-term prospects), its tonality and readability will have a significant impact on the average annual stock prices of Russian firms. Panel regression analysis was used to analyze management letters and financial indicators of 52 Russian companies over a five-year period from 2013 to 2017. The text tonality was calculated using the Loughran & McDonald thematic dictionary, and the availability of non-financial information was calculated by using specialized dictionaries. The evaluation of panel regression parameters revealed a relationship only between the positive sentiment in the text and the average annual price of a firm's stock, while the negative sentiment in messages does not affect the dynamics of quotations. For the CEO's letters, variables reflecting the subject of a long-term business orientation and human capital were significant, while for letters by the chairman of the board of directors, only the text characteristic of a long-term business orientation was significant. For both types of letters, a positive relationship was found between the variable describing the readability of the document and the average annual stock price. The sample of the study (the number of companies) was limited since annual reports of the companies were used in English on the grounds that there are currently no Russian-language financial dictionaries for text analysis. The obtained research results can be useful for investors and other users of public annual reports of issuers, as well as for representatives of government agencies when forming regulatory requirements for the level of disclosure of mandatory information by issuers.