When EU Leaders Speak, the Markets Listen

^†Additional materials are available in an online Supplement at the journal's Taylor and Francis website (http://dx.doi.org/10.1080/09638180.2014.884931).

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.

Acknowledgements

The authors are grateful to an anonymous reviewer, Joseph Piotroski, Laurence van Lent, Richard E. Ottoo and participants of the Fourth Annual Meeting of the Academy of Behavioral Finance & Economics for their helpful comments. We retain responsibility for all remaining errors.

Notes

^† Additional materials are available in an online Supplement at the journal's Taylor and Francis website (http://dx.doi.org/10.1080/09638180.2014.884931).

¹ Since our study models returns on broadly diversified stock market indices, the variance of these returns consists of pure systematic risk. The R² coefficients in our regressions including only the political variables derived from our text analysis were in the region of 0.2, indicating that political changes account for a large fraction of the systematic risk.

² Bhattacharya, Galpin, Ray, and Yu (2009) and Wisniewski and Lambe (2013) are other examples of finance papers that applied a variant of content analysis.

³ This archive can be accessed on http://www.european-council.europa.eu/council-meetings/conclusions

⁴ MSCI Europe and MSCI World indices used in this study aggregate constituent market values denominated in local currencies. Consequently, these indices record only pure stock market fluctuations without accounting for the foreign exchange movements. However, we note that the use of MSCI Europe and MSCI World indices for which the aggregation has been conducted in US dollars does not change the conclusions presented here.

⁵ The equivalent differences for CAR(-1,1), CAR(-1,3) and CAR(-1,5) are 1.6%, 2.5% and 3.3%, respectively, for the European stock market index and 1.1%, 2.2% and 3% for the world index.

⁶ One may argue that the language of the communications will be, at least to a certain extent, a function of the agenda items discussed. However, we find that in cases where the provisional/draft agenda was pre-announced, the pre-announcement occurred significantly in advance of the meeting. Near-efficient capital markets would be expected to discount such information immediately. Should there be any price effect related to the selection of agenda items, it would most likely transpire prior to our (-1,5) and (-1,10) event windows.

⁷ The 28th member state (Croatia) joined EU in July 2013, which is after the end of our sample period.