The rise of computerized textual analysis – using techniques from computer science and linguistics to analyze mounds of language data – has given financial market participants unprecedented insight into the quality of corporate narrative disclosures. Two recent studies highlight the changing financial information environment while offering investor relations practitioners the chance to put the same transformative technology to use communicating with investors, analysts and the C-suite.
One study examines earnings call transcripts, looking to spot sentiment changes in participants’ tone. Investigators find portfolios that are long stocks with improving tone and short stocks with decreasing tone tend to outperform – even controlling for common risk factors. ‘The interest in quantifying text is exploding now,’ says John Blaine, vice president of business development at AlphaSense. ‘The market, the quant market in particular, has strong interest in understanding what people are saying and how they are saying it.’
The research, produced by analytics firm ExtractAlpha, uses AlphaSense’s financial search engine to collect and measure transcript sentiment. Blaine believes IROs can use the same technology to harness Big Data for their own research. ‘Investors and analysts use this tool,’ he says. ‘Being on the same footing as the Street lets you prepare for the kinds of questions it is likely to ask.’
Across the pond, UK researchers have unveiled a free software tool that’s given investors and corporates similar access to giant batches of corporate narrative information. Called Wmatrix-import, the web app is being used to analyze – and score – UK annual report narratives with maximum scope and sophistication.
Steven Young, head of the accounting and finance department at Lancaster University, is developing the new disclosure metric. ‘We would use a range of inputs like readability, length and tone benchmarked against underlying performance to see whether there was any disparity,’ he says. ‘It would be similar to the corporate governance scores provided by proxy voting agencies.’
Young says the Wmatrix tool is perfect for IROs who want to benchmark their annual report against a peer group. ‘That would give them more insight into how firms are doing things differently or how they are reflecting normal practice within their group,’ he notes. ‘The bigger your sample, the more precise your measure against which to compare.’
Tuning in, turning on
New research suggests the more a CEO’s gestures and manners exude competence during roadshow presentations, or the more the manager is viewed as attractive or trustworthy, the more likely he or she is to have a higher-priced IPO. Moreover, say investigators, the impressions gained from face time with a chief executive translate into persistent value.
‘Investors definitely find value in seeing management,’ says study co-author Elizabeth Blankespoor, assistant professor of accounting at Stanford University. ‘They get value from the verbal information [CEOs communicate], but they also get to assess them as people. And for better or worse, they’ll incorporate those perceptions into investment decisions.’
To study the effect of subjective impressions on IPO price, Blankespoor and her colleagues presented about 900 people with 30-second video clips of actual CEO presentations. They filtered the audio to obscure meaning while retaining vocal pitch and rhythm. Participants rated the CEOs on attractiveness, competence and trustworthiness. The researchers found that raising the average CEO’s perception score by just 5 percent raised the IPO’s final market price by about 11 percent above what would be expected based on fundamentals alone. Notably, firms run by the CEOs with higher scores still had better-performing shares a year after the IPO.
Blankespoor says the result helps explain why investors consider roadshows so important. ‘The nice thing about focusing [on non-verbal cues] is that they are so difficult to adjust,’ she says.
