Discourse Uncertainty and Belief Polarization in Financial Markets : Evidence from Equity Analysts

An important determinant of belief polarization is the different interpretations of the same information. We examine whether discourse uncertainty in corporate disclosures, an important driver of differential interpretations, leads to polarization in financial markets. Using a novel measure of discourse uncertainty derived from the computational linguistics literature, we find that discourse uncertainty intensifies analysts’ tendency to interpret information in the direction of their prior beliefs. Consistent with theories of bounded rationality and behavioral biases, the effect is more pronounced when analysts follow more firms, have less experience, and process lengthier 10-K. At the firm level, discourse uncertainty is positively associated with forecast distributions that are more dispersed and exhibit stronger bimodal patterns, consistent with belief polarization. Our findings shed light on characteristics of qualitative information that may give rise to belief polarization