Emotional Media Content, Profitability Growth, and Long-term Return Reversals

Abstract

We distinguish textual tone—the balance of positive and negative words—with emotional versus factual content and posit that media tone only with emotional content represents investor sentiment. Consistent with this hypothesis, a High-Minus-Low portfolio formed on firm-specific media tone generates large negative three-year alphas of up to -18% when content is emotional but insignificant alphas when factual. The significant alphas arise only from the idiosyncratic component of media tone. The return reversal pattern synchronizes with reversals in profitability growth (ROE). Overall, emotional media tone captures overreaction to past profitability growth and subsequent correction of mispricing in the long run.