Home > company information, UoM Research > Chairman’s optimism and future return uncorrelated?

Chairman’s optimism and future return uncorrelated?

chairman's statement optimism and following year return (click to expand)

chairman’s statement optimism and following year return (click to expand)

This scatterplot shows the relationship between the percentage total return in the following year (RetP1) and the optimism of the chairman’s statement in the annual report (Optim). In general it appears that increased optimism only corresponds with increased variability in returns.

This has only been done for a small sample of 29 FTSE 100 companies over the years 2006-2011. The main purpose was to provide an example of analysis using textual, rather than numeric, information in company annual reports.

Steps followed:

  1. Identify the FTSE 100 companies at 31 December 2011. [Historical FTSE 100 Index constituents (July 2012)]
  2. Obtain the annual reports for a sample of these companies. [Where can I find current and historical company annual reports?]
  3. Convert the annual reports from PDF to Text.
  4. Extract the chairman’s statement from each report.  (This could only be done manually one report at a time)
  5. Analyse the statements using the text analysis software Diction.
  6. Link the results from Diction with the total return (obtained from Datastream) for the same and following year [Total shareholder return (July 2011)].

From a library perspective the main interest is the research process rather than the results, and specifically the data collection needed to assemble a dataset for analysis (steps 1-4 above). Researchers have to work hard to transform the raw data available to them into a dataset ready for analysis.

Related Research

Manchester academic research in a similar area –

Schleicher, T.  (2012) “When is good news really good news?” Accounting and Business Research 42, no. 5, pp, 1-27. eScholarID:158855 | DOI:10.1080/00014788.2012.685275

Schleicher, T., Walker, M. (2010)  “Bias in the tone of forward-looking narratives.” Accounting and Business Research 40, no. 4, pp. 371-390. eScholarID:75654 | DOI:10.1080/00014788.2010.9995318

Further exploring our small sample dataset

Another scatterplot showing the relationship between the percentage total return in the current year and the optimism of the chairman’s statement shows a similar lack of correlation.

Summary stats (click to expand)

Summary stats (click to expand)

Looking at both the certainty and the optimism that is measured in the chairmen’s statements, this small sample shows that a certainty below average and an optimism below average give a total return in the following year, and in the current year, that higher.

This is only  a small sample, and we have no theory why selecting companies because their chairman’s statement is uncertain and pessimistic should be better than random selection.

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