How investors process the textual tone and content of corporate press releases varies greatly across topics, according to scientists at the University of Freiburg in Germany. For example, an upbeat announcement on financial performance or management changes is likely to be received positively among investors and lead to a stock price uptick. On the other hand, research evidence suggests that using the same tone when announcing an M&A or share issue will backfire.
‘Investors process qualitative information differently according to the underlying topic,’ explains Stefan Feuerriegel, group leader at the university’s Finance Research Group (FRG). ‘It’s important to communicate different sorts of information in different styles.’
Using state-of-the-art text-mining techniques, Feuerriegel’s team crunched thousands of English language ad hoc announcements by German companies to extract 40 topics. Next, the researchers analyzed the qualitative tone of each disclosure to study the effect of sentiment on abnormal returns and whether it varies across different topics.
They find that regardless of content and writing style, news releases about many topics have no significant influence on stock performance – these include news covering legal issues, renewable energy initiatives or capital increases. What really drives markets, they discover, are financial reports, news about senior managers, mergers or acquisitions, share issuance and (for banks) loan distributions.
‘An M&A announcement leads to a median stock market return of around 1 percent,’ says Feuerriegel. ‘But the language in that announcement is regarded negatively. That is, the more positive words it contains, the more negative the stock market return. These findings can help IR professionals prioritize their agenda. They suggest IROs should spend less time reporting on things such as technology development and devote more effort to putting managers in front of investors. It seems management, as a topic, is extremely important for stock returns.’
Based on this research into qualitative information processing, the University of Freiburg is developing a product application designed to help IR practitioners craft better communications. ‘The software is intended to help IR and media relations professionals identify whether their texts and press releases contain words that are negatively related to market returns,’ explains Simon Alfano, an FRG research team member. ‘It will empower them to use language that is more carefully tailored to investor needs and investor perception of news sentiment.’
Until then, it would seem prudent to adjust exuberant prose style toward greater alignment with fact-based content. Sometimes, sugarcoating can leave a bad taste in investors’ mouths.
Good communication lifts M&A odds
Researchers at London’s Cass Business School have uncovered a powerful link between how an M&A deal is announced and the chance of it being completed. Analyzing almost 200 M&As, they find:
- Eighty-four percent of deals announced as actual offers are completed. That compares with a success rate of only around 50 percent for deals where the initial communication is in response to a press or regulatory inquiry
- Deals where both companies involved are represented by PR agencies have the highest completion rate
- Announcements containing quotes from the chief executive or chairman of both the target and the acquirer company have the highest rate of closure, at 91 percent. Those with no leadership statements succeed only 67 percent of the time.
‘You want to be in control of the announcement process as much as possible,’ says Scott Moeller, director of Cass’ M&A Research Centre. ‘[You want] to make sure leadership on both sides is seen to be behind the deal. And you want to include a PR firm to really hone the message.’
Curiously, the research finds that markets – in the very short term – reward a lack of public information about an M&A transaction. Still, if deal completion is the object, Moeller says clarity and transparency are paramount. ‘Making a surprise announcement without a great deal of detail will not be in a company’s long-term interests,’ he says. ‘You really want to have all your ducks in order.’
This article appeared in the summer 2015 print issue of IR Magazine
