Author(s): Amira Hassan
Mentor(s): David Olsen, Cindy Greenman
Institution UTech
This study investigates the influence of sentiment in SEC comment letters on stock returns, combining sentiment analysis with statistical models to analyze market responses. SEC comment letters, which address compliance, financial reporting, and legal concerns, can signal issues that impact investor sentiment and stock performance. Our research explores sentiment derived from these letters and its relationship with stock returns, using the Loughran-McDonald, FinBERT, and VADER sentiment models. Key variables include daily returns, volume, and filing frequency. Data processing involved scraping and retrieving approximately 470,000 SEC comment letters, followed by extensive cleaning and preprocessing to ensure consistency in date formats, sentiment scoring, and issue classifications. Focusing on filings related to financial statement issues and regulatory compliance, this rigorous data preparation enabled a robust analysis of market responses. To assess sentiment’s impact, linear regression and ANOVA were applied to evaluate returns before and after filing dates. T-tests revealed a significant decline in returns post-filing, suggesting that disclosures can trigger market caution. Further, ANOVA results highlighted that companies with low filing frequency experienced more positive returns, implying that frequent filings may signal ongoing regulatory scrutiny and impact investor confidence negatively. Sentiment scores alone showed limited predictive power for stock movements; however, classifications such as Environmental, Social, and Governance (ESG) and Segment Reporting correlated positively with returns, suggesting that favorable sentiment in these areas can influence stock performance. Additionally, Dunn’s post hoc test indicated significant differences in sentiment across classifications, showing investor sensitivity to specific disclosure topics. This research reveals that while individual sentiment scores are weak predictors, they gain value when considered alongside factors like filing frequency and classification type. Companies with infrequent, concise filings and favorable sentiment in ESG and Segment Reporting tend to elicit more positive market responses. This study contributes to the understanding of how regulatory disclosures shape investor behavior, highlighting the nuanced role of sentiment analysis in financial markets.