When Talk Isn't Cheap: The Corporate Value of Political Rhetoric

Abstract

Does political rhetoric matter for firms and investors? We conduct a textual analysis of all 388 gubernatorial “State of the state” speeches given between 2002 and 2010 across U.S. states, to examine this question. Political speeches may reduce policy uncertainty (Pastor and Veronesi, 2012), reflect the politician’s views regarding the economic future of the state, and contain new information regarding future policies that affect the business environment. Using data on 5,721 firms matched based on their location of their headquarters and main operations, we conduct an event study examining the market reaction to the tone of the State of the state addresses. To examine whether the information has a long-run impact on firms, we also consider changes in firms’ investment and employment decisions. Controlling for speech length, firm, and state-level characteristics, the results show a statistically significant and positive association between the level of optimism expressed in a Governor’s speech, and the abnormal returns of firms headquartered in that Governor’s state. We also find that a more optimistic speech is associated with a statistically significant increase in investment and employment, relative to firm size, whereas a more pessimistic speech is associated with a decline in investment and employment for firms located in that state. To identify the impact of the speech on firms, we show that the results are robust to identifying the geographic focus of firms’ operations, using a matched sample of firms located in neighboring states as a control group, and instrumental variables. To identify channels by which the content of the speech may have an impact, we show that firms that obtain state-government contracts, and those that are more dependent on skilled human capital and therefore education spending, significantly increase investments if the budget-related and education-related parts of the speech are more optimistic. We also find that political rhetoric is most informative during uncertain economic conditions, when government policy has had a greater impact. Lastly, we show that institutional characteristics, such as term limits and state-level transparency, affect the response of firms to the speech. * Art Durnev is at the Henry B. Tippie College of Business, University of Iowa, artem-durnev@uiowa.edu; Larry Fauver is at the University of Tennessee, lafauver@utk.edu, and Nandini Gupta is at the Kelley School of Business, Indiana University, nagupta@indiana.edu. We thank participants in the finance department seminars at Indiana and Iowa, IU Maurer School of Law, 2013 CICF Conference, Shanghai, 2013 CAF Conference at Indian School of Business, and the American Economic Association 2014 meetings.