Can uncertainty explain residual returns?:

: evidence from UK non-financial firms

Abstract

This study analyses the impact of textual uncertainty in the CEO and Chairman sections of UK non-financial firms’ annual reports on residual stock returns not explained by the Fama-French 3-Factor model. The study incorporates data from 1344 companies listed on the London Stock Exchange over the 2011-2016 period. By applying a methodology that uses Ordinary Least Squares regressions and textual analysis, this study aims to bridge a gap in the literature about uncertainty and its impacts. Opposite to what was expected initially, these findings suggest that uncertainty as a measure of financial narratives does not impact annual residuals in any of the sections analysed, thus, it is not a reliable explanator of stock performance. The findings also challenge previous notions about executive narrative styles’ influence on market behaviour and provide insights for investors about the weight of uncertainty in corporate reports on the market. The study underscores the necessity for further research in this field, specifically for different report sections and time frames. This work contributes to the academic literature by testing the predictive power of uncertainty and provides practical implications for the way investors and analysts will interpret the uncertainty aspect of corporate disclosure.

Date of Award	15 Jul 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Paulo Alves (Supervisor)