Abstract
We use content analysis software to examine certain characteristics of communications arising from European Council meetings. These characteristics appear to explain a large proportion of variation in stock returns around the meeting dates. More specifically, stock market investors react favourably when the conclusions and declarations issued by heads of states convey a positive sentiment and demonstrate a stance of moral rectitude. On the other hand, the returns tend to be negative when the communications are obfuscated by an excessive use of abstract words and fixated on regional rather than global issues.
Highlights
Prior research has sought to measure the impact of political environment on accounting practices (Bushman and Piotroski, 2006) and on price formation in capital markets
The results presented in Perotti and van Oijen (2001) corroborate the claim that political risk is an important barrier to stock market development, as measured by the growth in market capitalization over GNP and the growth in trading activity
Event Studies Since the European Council meetings essentially constitute a series of events with clearly defined dates, the use of an event study approach is appropriate in this context
Summary
Prior research has sought to measure the impact of political environment on accounting practices (Bushman and Piotroski, 2006) and on price formation in capital markets (see for instance Santa-Clara and Valkanov, 2003; Herbst and Slinkman, 1984). We use content analysis software to quantify the sentiment and other text characteristics of official communications arising from the meetings of the European Council. Since the meetings of the European Council are intended to tackle global problems, devoting an inordinate amount of time to local concerns can detract attention from the main objectives. It appears that declarations reflecting a stance of moral rectitude are welcomed by the markets.
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