UT study: Governors speeches impact business investments

News release from University of Tennessee:
The tone and content of a politician’s speech affects whether businesses make financial and employment investments in that politician’s state, according to a new study from UT.

Larry Fauver, the James F. Smith Jr. Professor of Financial Institutions in the College of Business Administration, co-authored the study, which examined gubernatorial speeches in the United States.

In the year following the speech, businesses in states where the governor gave a more optimistic speech invested 2 percent more of their capital compared to firms in states where the governor gave a more pessimistic speech.

Similarly, firms in states where the governor gave a more pessimistic speech employed 0.4 percent fewer workers than those in states that heard a more optimistic speech, according to the study.

The results were featured in the fall edition of Insight, a publication of the Indian School of Business in India.

Fauver’s co-author, Nandini Gupta, presented the research January 5 at the American Economic Association meeting in Philadelphia.

Fauver and co-authors Art Durnev of the University of Iowa and Gupta of Indiana University studied 388 “State of the State” gubernatorial addresses across all fifty states between 2002 and 2010. They also observed 5,721 firms during the same time period, and, based on the location of their headquarters, examined their response to the tone of the speech.

The researchers used software to analyze words in the addresses and identified them as either delivering a positive/optimistic message or negative/pessimistic message.

Optimistic words such as “successful,” “pride,” and “patriotism” expressed positive, endorsing language. Pessimistic words such as “malicious,” “unemployment,” “nothing,” and “bankrupt” reflected hardship and denial.

The study found that political speeches likely decreased firms’ uncertainty regarding government policy on issues such as taxation, subsidies, and education, which can affect asset values, investment, and output decisions.

“Conversely, political speech may be uninformative rhetoric reflecting a political agenda or may simply reproduce information already known to investors and firms,” the study states.

Other study findings:

Firms that obtain state government contracts significantly increased investments if the budget-related parts of the speech were more optimistic.

Companies that are more dependent on skilled employees significantly increased their investment spending if the education-related parts of the speech were more optimistic.

When economic times were tougher and information less available, firms paid more attention to the speeches. This suggests that the political speeches are informative and contain information that is relevant to firms and investors.