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UI Researcher Uses Software to Analyze Branstad's Speech

When Gov. Terry Branstad touted "the Iowa Dream" in his Condition of the State address Tuesday morning, it wasn't just empty political noise, according to University of Iowa researcher Art Durnev.

The governor's optimistic rhetoric may well boost the stocks of Iowa-based companies and lead to an increase in capital investments within the state, according to a new study coauthored by Durnev.

Durnev, an associate professor of finance at UI's Tippie College of Business, is among a trio of researchers who have scrutinized the State of the State addresses delivered by governors from all 50 states from a nine-year period, then compared the tone of those speeches to changes in the states' economies.

"Our main result is that if a governor makes a more optimistic speech than average, then those companies experience better stock returns relative to the market. The magnitude is not huge, but it's significant," Durnev said. He added: "Even more interesting is that subsequently companies invest more, and they hire more workers after a speech that is more optimistic."

The researchers ran 388 speeches from 2002 to 2010 delivered by governors in all 50 states through computer software designed to scan the texts for keywords and create a numerical index. "Successful" or "pride," for instance, would register in the optimism column, while "unemployment" or "bankrupt" would up the pessimistic total.

At the Press-Citizen's request, Durnev ran Branstad's 3,685-word speech from Tuesday through his software program to calculate its tone. He found that for every 500 words, Branstad used 17.7 optimistic words and 4.4 pessimistic words.

Thus, Branstad's "net optimism" total was 13.3 Tuesday, which was slightly higher than the average of 12.3 registered by Condition of the State speeches delivered by Tom Vilsack and Chet Culver in the nine years studied by the researchers. Tuesday's speech, in terms of net optimism, was also on par with the national average of 13.5, Durnev said.

The big questions the researchers tackled was whether or not governors are delivering new information in their addresses not previously available to investors and companies, and whether those investors are paying attention to the speeches.

"I was kind of leery that political speeches even matter, as most people would believe that politicians aren't saying anything new and they're just up there not providing you with relevant and key information," said Larry Fauver, an associate professor of finance at the University of Tennessee and a coauthor on the study with Durnev and Nandini Gupta of the University of Indiana.

But after analyzing how the stocks of more than 3,000 publicly traded companies performed in the three days following a governor's speech, the researchers found that stocks of companies in that state showed abnormally high returns—a 0.4 percent bump—if the governor gave an upbeat speech. The opposite was true—a 0.2 percent loss—after a less-than-enthusiastic speech by a governor.

The study, which has yet to be published but which was presented at an American Economic Association conference earlier this month, also suggests that managers make capital investment decisions based on the addresses. Companies headquartered in more optimistic states, for instance, invested 2 percent more of their capital in the year following the address than pessimistic states—particularly those with more government contracts and those more dependent on skilled workers.

"In a big way, investors and firms pay attention to what the governors are saying," Fauver said.

Brian Mitchell, cofounder of SM Capital, an Iowa City-based investment firm that works with entrepreneurs, said optimism about the direction of the state's economy is an important factor for investors.

"It goes without saying that when you have a positive story to tell, people are going to want to participate," Mitchell said.

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