Textual uncertainty in financial disclosures and information asymmetry among investors

Abstract

Prior literature documents a temporary spike in information asymmetry between sophisticated and unsophisticated traders around corporate disclosures because the former process new information faster. Using advances in textual analysis, we show that when management issues more uncertain financial statements, the resulting spike in information asymmetry is significantly lower than for firms that use less uncertain text. Furthermore, textual uncertainty measures of the disclosures are negatively associated with Intermarket Sweep Order (ISO) volume, an order type commonly used by sophisticated traders. This suggests sophisticated traders and algorithms are less able to extract value-relevant information from financial disclosures when they are uncertain.