University of Iowa research finds link between positive governors and stocks
Iowa ranked as the eighth most optimistic state
Annual “state of the state” addresses might seem like your standard political rhetoric, but a University of Iowa researcher says he has proof the speeches are more significant than many realize.
The tone a governor takes in his or her speech has an impact both on immediate stock prices of firms in that state and on their investment behavior in the future, according to UI associate professor Art Durnev.
Durnev, a finance professor in the UI Tippie College of Business, looked at 388 state of the state addresses given by governors in all 50 states from 2002 to 2010 and found that stocks had better returns in states with upbeat reports.
Researchers determined whether a governor’s tone was positive or negative using software that scanned the text of speeches for optimistic words like “successful” and pessimistic words like “unemployment.”
After scanning each speech, the software created a numerical index that ranked them from most optimistic to least optimistic. Researchers then compared how the stock of more than 3,000 publicly traded companies performed in the days following the governor speeches.
Stock of companies headquartered in states with optimistic governors showed high returns. Firms in states at the bottom of the optimism index showed stock loss, according to the research.
Over the duration of the study period, Iowa ranked as the eighth most optimistic state with an average of 16 more optimistic words then pessimistic words per speech. Nevada’s governors gave the most positive addresses – with optimistic words outnumbering negative words by an average of 24 a year, according to the research.
Other states topping Iowa in optimistic speeches include Georgia, Vermont, Rhode Island, Florida, Nebraska and Minnesota. The least optimistic states include Massachusetts, Pennsylvania, South Dakota, and California at the bottom of the list, averaging just five more positive words than negative words.
The year during the study period that Iowa’s governor gave the most optimistic speech was 2010, when he used about 32 more optimistic words than pessimistic words. The year with the least optimistic speech was 2009, when negative words actually outnumbered positive words by about two.
The study, titled “When Talk Isn’t Cheap: The Corporate Value of Political Rhetoric,” will be presented at the American Economic Association’s annual meeting in Philadelphia on Jan. 3.
It was co-authored by Larry Fauver, with the University of Tennessee, and Nandini Gupta, with the University of Indiana.
Durnev said the results “strongly dispel the notion that political rhetoric is pure noise ignored by the market players.”
“We show that politicians possess valuable information not known in advance by investors and managers,” he said.
The research suggests that managers make investment decisions based on the speeches. Managers headquartered in strongly optimistic states invested 2 percent more in the following year than those in the least optimistic states.
The link between stocks and speeches were not as significant when outgoing governors were making them, Durnev said. That, he said, could be because the governors no longer were setting the policy agenda.
He also said governors were less optimistic when the opposite political party was in the White House.Most governors make their state of the state speeches in January, and Durnev said he expects his study’s findings will affect the tone some of them take.