Contagious Narratives: Language Diffusion and Firm Outcomes in Corporate Disclosures

Abstract

Although economists have long theorized that the beliefs firms hold about their future prospects shape their investment decisions, the role of language in forming and transmitting those beliefs remains an open empirical question. This paper studies whether a firm’s narrative-- the interpretive language a firm uses in mandatory SEC filings to describe its business conditions and outlook-- spreads contagiously across industry peers and shapes real economic outcomes. While prior work has studied narrative contagion at the aggregate level, this paper shows that narratives spread quarter-to-quarter across industry peers through public corporate disclosures. I measure this narrative as aggregate sentiment, the combined language signal a firm absorbs from three sources: its own disclosure history, industry peers' disclosures, and macroeconomic policy communication. To capture each source, I apply three text analysis approaches of increasing complexity: the Loughran-McDonald dictionary captures tone direction, Latent Dirichlet Allocation captures thematic content, and BERTopic captures semantic concentration. Applied to a panel of 597,031 SEC 10-K and 10-Q filings from 12,749 publicly traded US firms over 2000–2020, each approach captures a distinct dimension of narrative content. I find that tone and thematic content operate through separate and opposite peer transmission channels. Peer negative sentiment spreads contagiously through tone: firms write more pessimistically after their industry peers do, and this transmitted pessimism reduces capital expenditure growth, peaking two quarters after the disclosure before reversing. Thematic content, by contrast, triggers competitive differentiation. When peers concentrate on a particular topic, firms diverge and emphasize different themes, generating heterogeneous investor interpretation that drives trading volume. These findings show that corporate language operates through two simultaneous forces: firms absorb the tone of their peers while differentiating on thematic content. What a firm chooses to write about, and how it chooses to write it, shapes both how peers respond and how it invests.