Words matter – to IROs as well as politicians

For any who doubt that our mission in investor relations overlaps with news-media coverage of companies, an article in the June issue of the Journal of Finance reports a study that parsed 350,000 news stories (100 million-plus words) on firms in the S&P 500 from 1980 to 2004.

What is intriguing in “More Than Words: Quantifying Language” is the attempt by two finance profs and a tech expert to translate language into numbers and capture their impact on stock prices. The findings offer some insights for IR as well as PR professionals:

  • Words do matter. Drawing on Dow Jones and Wall Street Journal coverage, the study found that negative words, especially, are predictive of lower earnings and shareholder returns in the future – and stock prices adjust, partially at least, with only a slight delay from publication.
  • Quantitatively, “the numbers” (that is, publicly disclosed results that many finance folks believe are all-important) account for only part of the change in stock price after an event. Analysts’ reactions also figure in. And the words have their own impact, statistically speaking.
  • Words can be classified as negative or positive. The authors use a linquistic database called the Harvard-IV-4 dictionary to analyze those 100 million words. Thinking in those terms, the point is decidedly not that a company should try to “spin” bad news into positive. But surely the IR team, in communicating results, should consider whether the words it uses appropriately convey the company’s intended tone.
  • The words in Dow Jones and WSJ stories, of course, are written by reporters – although stories often pick up words from press releases or statements. To me, the point is that news reporters are intensely relevant to the process (which some CEOs and CFOs don’t understand).
  • News coverage of companies spikes dramatically around quarterly earnings announcements – one day before, the day of earnings, and one day after. Seems obvious, but this strongly suggests the importance of seizing the quarterly “news peg” to reinforce key messages.
The authors explain the incremental impact of words on stock prices: “Linguistic communication is a potentially important source of information about firms’ fundamental values. Because very few stock market investors directly observe firms’ production activities, they get most of their information secondhand.”
Of course, traders do watch news stories – seeking to capitalize on the market’s short-term underreaction. The authors note: “Even if economists have neglected the possibility of quantifying language to measure firms’ fundamentals, stock market investors have not.” And neither should we.
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2 Responses to “Words matter – to IROs as well as politicians”

  1. Susan Kishner Says:

    A friend of mine just emailed me one of your articles from a while back. I read that one a few more. Really enjoy your blog. Thanks

  2. Dick Johnson Says:

    Thanks for your kind words, Susan. Please feel free to offer feedback on where I’m off base or how I can do better – life is a learning exercise. All the best!

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