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Leveraging Textual Analyst Sentiment for Investment

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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))

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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.

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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.

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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
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  2. Timo Schäfer
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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.
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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

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

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  • Online ISBN: 978-3-030-64466-6

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