The Use of Word Lists in Textual Analysis

A commonly used platform to assess the tone of business documents in the extant accounting and finance literature is Diction. We argue that Diction is inappropriate for gauging the tone of financial disclosures. About 83% of the Diction optimistic words and 70% of the Diction pessimistic words appearing in a large 10-K sample are likely misclassified. Frequently occurring Diction optimistic words like respect, security, power, and authority will not be considered positive by readers of business documents. Similarly, over 45% of the Diction pessimistic 10-K word-counts are not and no. The Loughran-McDonald [2011] dictionary appears better at capturing tone in business text than Diction.