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The Value of a Speech

Art DurnevA new study by a University of Iowa researcher has found that the tone of a governor’s state of the state address has an immediate impact on the stock prices of firms based in that state and in their later investment behavior.

The study, coauthored by Art Durnev, associate professor of finance at the university’s Tippie College of Business, finds that stocks have better returns when they’re based in states where the governor strikes an upbeat tone in his or her annual address before the legislature.

“Our results strongly dispel the notion that political rhetoric is pure noise ignored by the market players, and we show that politicians possess valuable information not known in advance by investors and managers,” says Durnev, whose study will be presented at the annual meeting of the American Economic Association in Philadelphia, Jan. 3-5, 2014.

The study looked at 388 state of the state addresses given by the governors of all 50 states between 2002 and 2010, and then defined them as being positive or negative in overall tone. To determine tone, the researchers used software that scans the text of the speeches and finds keywords identified as optimistic (“successful,” “pride”) and pessimistic (“unemployment,” “bankrupt”). It then creates a numerical index to determine the overall tone of address.

As an example of an optimistic address, Durnev cited the first sentence of the state of the state given by Nevada Gov. Kenny Guinn in 2005: “I am proud to report that the state of our state is strong….very strong.”

Compare that to Virginia Gov. Mark Warner, who sounded downright foreboding when he started his 2004 speech with, “Since we met in this chamber a year ago, our nation and our commonwealth have faced many challenges. Tonight, many of those challenges continue.”

The index ranks the addresses from most to least optimistic. Nevada’s governors gave the most optimistic addresses during the study period, with optimistic words outnumbering negative by 24 on average per year. California was the least optimistic, with optimism outnumbering pessimism by only 5 words.

The researchers then compared how the stock of more than 3,000 publicly traded companies performed in the days following each speech by the governor of each firms’ headquarters state. They found that the stock showed abnormally high returns following an optimistic state of the state given by the governor of each company’s headquarters state. Those firms in the top third of the optimism/pessimism index showed abnormal stock returns of .4 percent in the three days following the address. On the other hand, firms in the bottom third of the index showed a stock loss of .2 percent.

The study also suggests managers make capital investment decisions based on state of the state addresses, as those headquartered in optimistic states invested 2 percent more of their capital in the year following the address than the most pessimistic states. Those that make the largest investments are firms with more government contracts and those more dependent on skilled workers.

Interestingly, Durnev says those results are not as significant in states where a governor who is not running for reelection is giving his or her last address. He theorizes this is because the markets discount the speech because the outgoing governor is no longer setting the policy agenda.

The economic impacts are also muted in states where the legislature is controlled by a different party than the governor, in large part because those speeches tend to be much more neutral in tone, Durnev says.

Durnev’s study, “When Talk Isn’t Cheap: The Corporate Value of Political Rhetoric,” is coauthored by Larry Fauver of the University of Tennessee and Nandini Gupta of the University of Indiana.


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