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Aug 31, 2011

IR Papers: The medium and the message

A roundup of academic research from the world of IR studies

More and more companies are turning to online video to disclose important information. In some instances, however, the endeavor may be counterproductive.

‘Using video to communicate with investors is not a panacea,’ says Lisa Sedor, assistant professor at DePaul University. ‘At times it’s better to stay well away from it.’

Announcing restatements is one of those times. In an experimental study comparing video and text-based press releases, Sedor and colleagues examined how an executive’s acceptance or denial of responsibility for the restatement altered trust and influenced investment decisions. Their results reveal that when a CEO accepts responsibility for the restatement, investors viewing an online video announcement recommend larger investments in the firm than those viewing online text.

By contrast, if the CEO denies blame by making an external attribution (such as to the auditors), video viewing investors recommend smaller investments.

‘Video is a great outlet for positive news,’ comments Sedor. ‘But firms with negative news need to go a step further and determine the level of responsibility they are ready to accept.

‘If the news is driven by something outside the company’s control and it won’t accept responsibility, using video can actually have a detrimental effect in terms of investor perception.’

Earnings language: press release vs MD&A
While they may be describing the same quarter’s performance, managers use much more optimistic language in earnings press releases relative to the corresponding management discussion and analysis (MD&A), according to US researchers.

‘Managers tend to disclose incremental pessimistic language in the MD&A, presumably in an attempt to reduce the negative market reaction to it,’ says Angela Davis, associate professor at the University of Oregon.

Davis and her colleague Isho Tama-Sweet at California State University, Fullerton used textual analysis software to analyze some 13,000 company quarters between 1998 and 2003. They find managers of businesses that exactly meet – or just beat – analysts’ expectations in the current quarter and managers of high-growth companies use less pessimistic language in their earnings press releases.

They also find that the more pessimistic the MD&A, the poorer the future performance.

‘Managers expect a greater market reaction to the press release than to the MD&A, and their language choices across the two disclosure formats reflect their efforts to manage that reaction,’ Davis concludes.

Sorrow and the pity
For stock prices, grief can be good. Sampling 1,374 Hollywood Walk of Fame celebrity deaths from 1926 to 2009, a Danish study finds an immediate 16 basis-point increase in stock returns after the death of a popular celebrity. ‘Following a stimulus that lowers mood, my data show people tend to be more risk-prone,’ says Gabriele Lepori, assistant professor at Copenhagen Business School. ‘Most previous studies have shown the opposite.’  

The effect is weaker for large caps, which are disproportionately held by institutional investors, and stronger in stock portfolios where pricing is more affected by behavioral biases.

This article appeared in the September print edition of IR magazine.