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Empirical test
An empirical test of of signalling
signalling theory theory
Burze Yasar
TED University, Ankara, Turkey
Thomas Martin
Eastern Kentucky University, Richmond, Richmond, USA, and Received 1 August 2019
Revised 5 February 2020
26 March 2020
Timothy Kiessling Accepted 29 March 2020
Sabanci University, Istanbul, Turkey

Abstract
Purpose – This study aims to support and extend signalling theory because of information asymmetry.
This study also aims to answer the call to further negative signalling and explore immediate reactions to
signals, thus alleviating a gap with regard to temporality of signalling.
Design/methodology/approach – The study used two separate data sources, the S&P 500 and 51,500
pages of the public papers between 1981 and 1999, nearly 20 years of data. Inter-rater reliability, controlled for
all macroeconomic announcements identified in the literature, is used, and the data are empirically tested
using generalized autoregressive conditional heteroscedasticity (GJR-GARCH) modelling.
Findings – In accordance with signalling theory and the efficient market hypothesis, the study found that
receivers do react to positive signals from a credible insider signaller to obviate information asymmetry. In
line with previous research, the study also finds that receivers react much stronger to negative signals.
Practical implications – Investors, financial managers and top executives responsible for their stock
price need to focus on presidential signalling as these directly affect market volatility. In particular, investors
and financial managers can predict stock price volatility based upon signals from the president.
Originality/value – This is the first research study that explores the correlation between presidential
signalling and market volatility. This study is important for investors and financial managers.
Keywords Leadership, Signaling theory, Management, Strategy, General management,
Communication theory, Stock market
Paper type Research paper

Introduction
The impact of marketplace signalling on financial markets has been widely researched [1], with
signalling theory as a powerful theoretical foundation that is increasingly used in management
research (Bergh et al., 2014) and in explaining investment decisions (Alsos and Ljunggren, 2017).
For example, recent literature on credit default swap markets suggest that dealers exploit
informational advantages vis-à-vis investors (Marsh and Wagner, 2016). Other research suggests
that prior to earnings announcements, bond trading activity increases because of information
asymmetry of new signals (Wei and Zhou, 2016). High-frequency changes in VIX are correlated
to macroeconomic announcements (Bailey et al., 2012) and research models suggest investors
react to new marketplace signals (i.e. earnings announcements) (Garcia et al., 2014). Research also
suggests significant causal effects of financial journalism and aggregate market prices (Dougal Management Research Review
et al., 2012) and how management disclosures send signals that affect investors (Koonce et al., © Emerald Publishing Limited
2040-8269
2016). Some varied examples of signalling theory in management studies use signals such as DOI 10.1108/MRR-08-2019-0338
MRR initial public offering (IPO) pricing, the characteristics of a top management team, number and
quality of strategic alliances, entrepreneurial founders’ reputation and the amount of politician
stock ownership (Ridge et al., 2016; Reutzel and Belsito, 2012; Ebbers and Wijnberg, 2012). Our
research tests a direct correlation between active managerial signalling and a reaction by
receivers, in specific presidential signals to marketplace stock volatility, which has not been
researched.
Relatively little research has focused on political factors although politics directly affects
stock volatility as measured by industry-level factors (international trade exposure, sensitivity
to contracts enforcement and labor intensity) along with local and global country-level political
variables (elections, autocracy, political risk and party orientation) (Boutchkova et al., 2010).
Although there has been much research on stock volatility, there is still great disagreement on
how to model volatility forecasting because of the inability to ascertain all the causal effects
(Bollerslev et al., 2006; Bekaert and Wu, 2000). Information asymmetry is the key foundation to
signalling theory with information intent and quality as the most important (Stiglitz, 2002), and
our research focuses on these two key elements. Our research hopes to add to the field by
suggesting that signals from the president influence investors decisions because of a signalling
of new policy and that investors will react and rebalance their portfolio.
Our research focuses on the president’s potential influence on financial markets because
of his informal power to give market signals through information in his formal and informal
talks. Although the market information is nearly always available prior to the presidential
rhetoric, the confirmation, denial or the additional new perspective has an effect on investors
as it is considered a reliable source. The diagnostic reasoning literature (Kelley, 1973)
suggests that investors are more likely to react to and overly rely on the presidential
explanation of events and rely upon his signalling (Koonce et al., 2016).
The assertion that presidential announcements create a market response agrees with
previous research that the volatility of prices is directly related to the flow of information to
the market (Ross, 1989). Presidential signalling could affect stock volatility as the early
resolution of uncertainty helps investors to plan (Epstein and Turnbull, 1980). Portfolio
holders show an aversion to ambiguity (payoff probability occurrence) (Ahn et al., 2010;
Bossaerts et al., 2010) and this interaction between risk and ambiguity is illustrated through
stock price volatility from negative political announcements (Bloom, 2009). Although in
agreement with the marketplace flow of information affecting the stock market, contrary
research suggests that ambiguity aversion correlates with portfolio inertia and can explain
sudden market freezes (Easley and O’Hara, 2010). When political news is negative, investors
maintain investment inertia as they can find risky stock allocations to hedge against such
ambiguous news (Illeditsch, 2011).
Financial asset risk and return is influenced by political uncertainty and there is a
negative association between financial asset valuations and the level of economic
uncertainty (Sy and Al Zaman, 2011; Ozoguz, 2009). The uncertain information hypothesis,
based on the core assumptions of the efficient market hypothesis, suggests that investors
are rational and are able to identify whether news is positive/negative but not able to
ascertain the true impact (Brown et al., 1993). As an example, research suggests that the
prior two weeks before a political election, there is an increase in stock prices (Pantzalis et al.,
2000). Other research focuses on the uncertainty of the election and finds that stock markets
are affected negatively if there is high uncertainty (Goodell and Bodey, 2012). Recent
research provides support for the political uncertainty hypothesis (which presumes election
results provide signals with regard to potential macroeconomic policies affecting business
and stock prices), thus implying the importance of information of political nature with
regard to public policy and stock markets (Goodell and Vähämaa, 2013).
 Examples of politics affecting stock markets have been illustrated from both theoretical Empirical test
and empirical evidence (Fowler, 2006). For example, the volatility index of the Chicago of signalling
Board Option exchange increased by 17% when the US House of Representatives voted
against the Federal Reserve bailout on September 29, 2008. Some research has examined
theory
stock market volatility and the political environment (Fuss and Bechtel, 2008; Bialkowski
et al., 2008), but none has examined presidential signalling and volatility. As it has been
noted that the president often delivers information regularly, the impact on the stock market
is of great interest to researchers and the subsequent managerial implications for investors
or financial managers.
One gap in the signalling research that researchers are continuously attempting to
overcome is that of how perceived alternative signals may affect the focus variable, and the
lack of multi-dimensional scales to measure the many signals occurring. For example, in
Spence’s seminal article (1973) that explores education level as a signal for an employer to
hire an individual, he describes that the multiple equilibria of the education model will
translate into differences that are either observable (i.e. age, gender, etc.) and those that are
alterable (i.e. level of education, certifications, etc.). However, current research attempts to
incorporate more multi-dimensional scales and now suggests that education may not be a
key to hiring individuals and networks and connections are the most important (Tandon
et al., 2018), social capital level within China will have the greatest effect on the hiring
decision (Zhang and Lin, 2016), that recruiters use a potential candidate’s social capital by
measuring their online network’s size and composition (Hedenus et al., 2019) and use of
guanxi in recruitment practice can overcome the liability of smallness (Ko and Liu, 2017).
Our research attempts to support signalling theory through a direct, immediate test of a
signal to a reaction by receivers.
Another gap in the research suggests that temporality will affect signalling and no
researcher has been able to capture the nuances over time (Drover et al., 2018). For example,
although entrepreneurship research suggests that a superior top management team and
well-known board of directors will imbue legitimacy and subsequently have a new firm
raise more capital (Plummer et al., 2016; Boyd et al., 2010), the hiring of these individuals
today will not signal success immediately, but over time. It has been suggested that past
signalling research that has had mixed results are because of not including time, as signals
have a time value element (Etzion and Peer, 2014).
Our research adds to a number of streams of literature. First, we provide support for
signalling theory through a direct relationship between credible sender and resultant action
by receivers. Our research eliminates the “time” constraint that may have caused
ambivalent results where past research has contradicted previous, shown no significance, or
in the opposite directions of theory (Connelly et al., 2011; Riley, 2001). We add to and
strengthen the use of signalling theory for management research. Our research also shows a
direct relationship between a signal and a reaction. Past research (although the researchers
control for numerous variables) often cannot control for other variables that may cause a
spurious correlation (i.e. brand image, CEO reputation, network relationships, informal
interrelationships for hiring practices, etc.) and our research controls for every variable that
is associated with the research stream, thus supporting the signalling relationship. Finally,
past research calls for more negative signalling investigation, and our research delves into
negative signals and the resultant reaction by receivers.

Theoretical foundation: signalling theory

The foundation of signalling theory suggests that the signaller has greater inside
information that is either not publicly known or has not reached the receiver, with the
MRR quality of the signal of equal importance (Spence, 1973). Although there is an abundance of
public information, there is an impasse between what is known and what can be construed
by new signals. Signalling theory suggests that negative or positive information when
illustrated by a signaller will be useful to a receiver (Kirmani and Rao, 2000). The signal is
either new information or in addition to previous held older information by a receiver.
The signal itself is significant, but for the receiver to be of interest, the signal must hold
significant quality (Connelly et al., 2011). A key facet to quality correlates directly with the
reputation and/or prestige of the signaller (Kreps and Wilson, 1982; Certo, 2003) because of
the large amount of signalling and market noise and the search for legitimate knowledge.
Both the signaller’s trustworthiness and the signal must be sufficient for a receiver to act
(Black and Owens, 2011).
Past management literature investigated many signals (pricing structures, firms in a
network of relationships, certifications such as ISO, etc., education and experience of human
resources, bilateral contracts and payment terms, firm/individual reputation and brand, firm
announcements, etc.), but in common, they all focus on information asymmetry. For
example, firm announcements can reach many receivers, can be focused to a particular
stakeholder, but the impact is determined by the perception of the quality of the sender
(Gomulya and Mishina, 2016). A key focus on the signal is the reputation of the sender. The
ability to manipulate the signal is dependent upon the reputation of the sender, and the
power of the signal will be directly correlated to the sender’s credibility (Kovacs and
Sharkey, 2014).
Some recent examples from signalling in the human resources field uses an employees’
personal reputation interacting with their political behaviour which will signal:

future uncertainty in their performance;

emotional exhaustion; and

job performance (Hochwarter et al., 2007).

In the entrepreneurship literature, heterogeneity in the top management team’s:

functional and educational background;

age; and

tenure

will signal the ability to address strategic challenges, thus attracting more IPO capital
(Zimmerman, 2008).
Another example suggests signals of an agency problem with a firm that is undergoing
an IPO: proportion of inside board of directors, equity owned by inside directors and number
of other boards the inside directors reside and to IPO underpricing (Arthurs et al., 2008).
Research into policy change announcements suggest that stock prices fall when a policy
change is announced through general equilibrium modelling (Pastor and Veronesi, 2012).
Political news can be classified as positive (favourable) and negative (unfavourable) with
favourable news decreasing uncertainty and unfavourable news increasing uncertainty.
According to Beaulieu et al. (2005), favourable news decreases stock return volatility and
unfavourable political news increases stock return volatility. Positive political
announcements have small effects while negative announcements of policy changes will
have larger effects because of the surprise element (Pastor and Veronesi, 2012). Recent
research proposing a new model of information suggests that investors discount good news
and react to bad news with asymmetric responses skewing the distribution of observed
returns: uncertain quality of the news generates negative skewness, whereas signals of
known quality generate positive skewness (Epstein and Schneider, 2008). Other recent Empirical test
research examining how information affects stock volatility modelled news as good or bad of signalling
agaınst stock volatility (Chen and Ghysels, 2010). The results of their research suggest good
news reduces the next day’s volatility, and very good news and bad news increase next
theory
day’s volatility.
Firms are aware of signalling to the marketplace and new research is focusing on
“strategic communication” which is the intersection of communication and the strategic
management literature streams (Thomas and Stephens, 2015). Strategic communication is
seen as communicating the company’s overall strategy to enhance its strategic positioning
(Argenti et al., 2005) and a deliberate use of various forms of communication and signals to
fulfill its mission (Hallahan et al., 2007). Strategic communication consists of written, oral,
advertising and symbolic information that bridges the gap between the firm and
stakeholders (Grunig, 2006). For example, social media has been used by governments for
transparency and collaboration (Agerdal-Hjermind and Valentini, 2015; Avery and Graham,
2013), firms responding to customer complaints (Bach and Kim, 2012) and influencing
customer opinions through corporate social responsibility (CSR) (Coombs and Holladay,
2009; Cho and De Moya, 2016; Bachman and Ingenhoff, 2017).

Hypotheses development
Our research uses signals sent to the stock market, so in this section, we explore how signals
affect the stock market and investors, or the receivers. There has been significant research
that illustrates the causality of new information to the market and how investors react to
that new information immediately which is the foundation of most economic and financial
theory. The efficient market hypothesis (EMH) has been the dominant theoretical
foundation suggesting that whenever new relevant information appears, investors update
their expectations appropriately and act immediately (Fama, 1965). Stock prices reflect all
past information, anticipate future expectancies and will react immediately upon new news
(Mehdian et al., 2008). The reaction often can be an “overreaction” and that new information
often may bring uncertainty, causing investors to sell some stocks and buy others, or
rebalance their portfolio (the overreaction hypothesis and the uncertain information
hypothesis) (De Bondt and Thaler, 1985; Brown et al., 1993).
Our research is important as it responds to current research to further explore market
inefficiency as in periods of financial instability (per research into the 2008 crisis on 12
Eurozone stock markets) agents may herd leading to abnormal pricing of stocks
(Anagnostidis et al., 2016). Market inefficiencies do exist as stocks were overvalued in the
Thailand stock market during late 1980s and early 1990s before the Asian crisis
(Wuthisatian and Thanetsunthorn, 2018), and a review of the stockmarket crash in the USA
in the 1920s suggests that a speculative bubble occurred (similar to the Thai market) which
led to stock prices to deviate from their true value (Wuthisatian et al., 2014). Other research
also suggests that in the European markets, the EMH may not be statistically significant
(Borges, 2010). However, as Ball (2009) contemplates, anomalies in the theory of market
efficiency are abundant as no theory can explain all the data, but that a combination of
imperfections in the markets themselves, how competitive markets behave or how we
research are all attributable to these anomalies, and research needs to continue for further
explanations, of which we hope our research contributes.
Professional investors will underweigh prior information and overweigh new signals and
will react to a new signal from a credible signaller (Kahneman and Tversky, 1982), and the
same overreaction will occur with professional investors as well (De Bondt and Thaler,
1985). Instead of a long-term perspective, investors place a huge importance on short-term
MRR developments and are overwhelmed with firm-specific signals such as dividend declarations
(Shiller, 1988). Past research suggests that professional investors are overconfident in their
abilities, and although there will be a market reaction, individual investors may interpret the
signal differently and the reaction may not be uniform (Mann and Locke, 2001; Ekholm,
2006).
Past research attempted to directly research a correlation between an announcement
(signaller) and receivers. Chan (2003) reviewed headlines in popular press with regard to
specific firms and compared these to the firms’ market information and suggested that
investors overreacted to the new information. Research that continued Chan’s research
focused on the type of signal (good or bad) and reviewed the Wall Street Journal and Dow
Jones News Wire and found that both positive and negative signals caused investors to react
(Pritamani and Singal, 2001).
The stock market is a good place to test signalling theory because of its importance of
usage in the management literature. From a methodological view with the ability to measure
a reaction, a key focus on signalling theory is the need for active receivers who are
continuously scanning the environment for new information that will give them an edge
over their competitors, in an immediate fashion, of which professional investors are.
According to the theoretical foundation of finance, professional investors will react
immediately to new news, become active upon it accordingly and so will provide a
measurable reaction to signals from a credible signaller.
As signalling theory is our theoretical foundation, we wish to test whether a top executive
(in this case, the top executive of the USA, the president) as a credible signaller, and whether
professional stock investors (receivers) react to a signal. Again, we used a broader unit of
analysis instead of individual CEO pronouncements, as attempting to measure the correlation
will be difficult to test because of the difficulty in defining and measuring the information from
any particular CEO (Mitchell and Mulherin, 1994). However, we are encouraged as past
research does suggest market volatility around the release of macroeconomic and government
announcements in general (Ederington and Lee, 1993).
There is a significant amount of contradictory research with regard to signalling theory as
some past research suggests that stories from the financial press have little impact; that there is
a very weak relation between announcements and stock prices; and that there is no correlation
between major news stories and large movements of stock prices (Roll, 1988; Schwert, 1981;
Haugen et al., 1991). More recent research suggests a correlation with new signals to the market
(Rangel, 2011) and that trade volatility is motivated by new signals to the market (Ane and
Geman, 2000). Research suggests, with regard to macroeconomic announcements by the
government for example, that volatility in the stock market will increase as new signals will
cause professional investors to rebalance their portfolio (Huang, 2007).
The speed of reaction by the receivers has been tested in the past, that within 5 min,
professional traders will react to new signals entering the market (Andersen and Bollerslev,
1998). Announcements with regard to monetary policy increased volatility (Bomfim, 2003)
and unexpected signals (such as might come from the president) also increase the volatility
(Jones et al., 1998). The speed of reaction to credible signals, and the use of computers with
high-frequency trading, is such that within minutes, high volatility will occur (Scholtus et al.,
2014).
As top executives are always delivering both good and bad news, we wished to examine
the impact of both as reactions are typically asymmetric. Based upon the theoretical
foundations of prospect theory and loss aversion (Kahneman and Tversky, 1982), past
research suggests that a bad signal will have a greater impact (Soroka, 2006; Singh and
Teoh, 2000). Because of cognitive weighting, even mildly negative signals will be viewed as
very negative (Fiske, 1980) as people focus more about a loss than a gain. Empirical research Empirical test
suggests that asset prices react more when there is a bad signal, than good signals (Corgnet of signalling
et al., 2011; Leippold et al., 2008; Galil and Soffer, 2011) but do react to good signals as well
(Nofsinger, 2001).
theory
From the psychology literature, investors are risk-averse, and negative signals should
have a greater impact than positive signals. Positive signals, however, should also cause
marketplace volatility as professional investors are seeking higher returns (Froot et al.,
1992). Neutral signals, or statements that are not overtly bad or good, or reiterate a past
statement, or do not speak of something crucial to the marketplace, will decrease volatility.
This is intuitive, as if the top executive makes a statement (perhaps with regard to a
competitor, or promotion of an employee, etc.) that is neither good nor bad, then the signal
infers no new information is forthcoming, whether good or bad.
Past research suggests that signals can be good (positive reaction receivers) or bad
(negative reaction by receivers), so our research set out to test this past research. For
example, research suggests that when signals were incongruous with a firm’s strategy,
the stock price decreased as these were signals accounted for by receivers as bad. When
a firm had misconduct and fired the CEO, the marketplace reacted favourably to a
positive signal of hiring an outside CEO or interim CEO as it indicates a desire to
reform, but reacts negatively to a bad signal of hiring a CEO internally (Connelly et al.,
2016). A firm’s earnings restatement signals to investors that their evaluations have
been violated and the firm’s stock is punished, but new positive signals (i.e. hire old
CEO/hire new CEO, take strategic actions, etc.) will cause investors to revalue the firm
(Gomulya and Mishina, 2016). A final example is mixed with both positive and negative
signals of a firm during bankruptcy. The bankruptcy is a negative signal; however,
research suggests that restructuring is a positive signal, but only is effective if external
stakeholders are also part of the signalling process assuring the ultimate success of the
firm after bankruptcy (Xia et al., 2016).

Negative signals
Research suggests that entrepreneurs are more sensitive to low-profit signals than advisors,
and will exit quicker (Elfenbein et al., 2017). Negative signals will affect those with “money
in the game” such as investors, who will react quickly. In accordance with how investor’s
react to negative news stronger than positive, research that explores founders’ status and
reputation separately found that the negative signal of low status and reputation had
stakeholders reacting much greater than the positive signal of a congruent status and
reputation (Stern et al., 2014).
Other negative signalling research suggests that earnings management (when managers
manipulate reported earnings) represents a negative signal as it may mislead some investors
about the underlying economic performance and quality of the firm (Nam et al., 2014).
Earnings management prior to an IPO is a negative signal as insiders will artificially inflate
the earnings of new public firms and cash out at a premium, whereas external investors will
not reap the same benefits. Other research of negative signals suggest that poison pill
application by top management (poison pills provide rights to existing shareholders to
purchase firm stock at discount prices to avoid a hostile takeover) in certain circumstances
signals to the marketplace that management is acting in accordance with agency theory,
protecting their own personal interests, and not those of the stockholders (Schepker et al.,
2018).
Firms that have had high CSR ratings typically are buffered from a singular firm wrong-
doing as high CSR signals a corporate focus of endeavouring to enhance society and are
MRR forgiven for a rare happenstance (Cornelissen et al., 2007). However, high CSR ratings
actually send a negative signal when there is corporate governance malfeasance such as in
option backdating (though not illegal, backdating is giving stock options on a past date,
today, to executives) (Janney and Gove, 2011). The hypocritical approach by management to
extol the firm’s virtues through CSR reporting management, yet reward themselves through
poor firm governance, sends an agency theory message to stockholders that there is
information asymmetry between the firm and the marketplace. As investors are risk-averse,
we suggest:

H1. Volatility will increase upon negative signals to the marketplace.

Positive signals
Signals are used to overcome lack of information in decision makers attempting to formulate
credible strategic decisions. Firms and individuals take heed of this as research shows that
positive signals such as when firms receive certifications from external organizations, media
rankings, placement in certain certification rankings, and hiring of prestigious top
executives reduce uncertainty about firms’ quality (Terlaak and King, 2007; Chen et al.,
2008). Founders’ status and reputation have been researched and when congruent sends a
positive signal., and contrarily, is a negative signal when not (Stern et al., 2014).
In a study with regard to commercial banking, evidence suggests that investors react
with confirmation bias when firms report good profitability and react to this positive signal
(Elfenbein et al., 2017). Confirmation bias suggests that individuals may weigh signals that
agree with their current position greater than those that will contradict their prior held
knowledge. As such, decision makers may not be totally rational and can be affected by new
signals to the market (Posen et al., 2018). Firm acquisitions in emerging markets give
positive signals for competitors and other external acquirers (Gaur et al., 2013). When firms
are acquiring firms in a particular industry, this signals to all incumbents and future firms
that wish to enter a successful and profitable industry to invest.
Signalling theory was used to examine how the number and various types of strategic
alliances signal to external stakeholders a firm’s potential ability and future success
attracting capital (Hoehn-Weiss and Karim, 2014). If a firm is able to develop and attain
strategic alliance partners, it signals access to resources and capabilities that will make it
successful in the future (Wassmer, 2010). As noted previously, investors are risk-averse, but
positive new signals will affect receivers, and hence we propose:

H2. Volatility will increase upon positive signals to the marketplace, but less than
negative signals.

Neutral signals
Executives often give speeches and presentations (e.g. TED talks) on other topics not
directly associated with their strategy, competitors or industry. We wanted to explore
whether signals that are not directly associated with their firm will influence receivers. From
a stock market perspective, when new information is introduced, but is not directly effecting
market performance, we would expect that the market would react by not rebalancing their
portfolio. Neutral signals would suggest that the signaller has not received new information,
whether good or bad, indicating that all is “par for the course”. Hence, we suggest that:

H3. Volatility will decline upon neutral signals to the marketplace.

Methodological framework Empirical test
To test managerial signalling, we will focus our research on the top executive of the USA, of signalling
the president. The president is a focus of receivers (professional investors) because of the
quality of the signal (in our research, because of limitations, we could only obtain data on
theory
Reagan, Bush and Clinton), and as professional investors react immediately to quality
signals, the market will react immediately to new signals. This broad unit of analysis is
helpful to management scholars, as it illustrates the power and importance of active
signalling by top executives, if they are a credible signaller.
There has been significant research that illustrates the causality of new information
to the market and how investors react to that new information immediately which is the
foundation of most economic and financial theory. The EMH has been the dominant
theoretical foundation suggesting that whenever new relevant information appears,
investors update their expectations appropriately and act immediately (Fama, 1965).
This theory further suggests that stock prices adjust instantaneously to unexpected
events and the arrival of new information (Mehdian et al., 2008). Recent extensions of
the theory suggest that investors often overreact to new information (the overreaction
hypothesis; De Bondt and Thaler, 1985) or that new information elevates uncertainty
and risk in the equity market (the uncertain information hypothesis; Brown et al., 1988,
1993) both causing investors to rebalance their portfolio. The only difference in these
hypotheses is in how the long-term effect of their immediate reaction to the new
information affects their future decisions.
The theoretical foundation for the president’s credibility is from the political science
literature that focuses less on the traditional behavioural models of bargaining and
negotiating, less on measuring power by the executive’s ability to get legislation passed, less
on the presumption that the president exercises and defines his power through deliberations
with Congress or the ability to go public, but on theoretical institutional capacity of the
executive to have economic impacts, specifically studying the effects of presidential
signalling on financial markets (Edwards, 2003). The foundational political science
literature suggests the focus of presidential power relates to an extension of the formal
executive power (Tulis, 1987). Presidential signalling is the means by which an
executive can defend the use of force and other executive powers and it is a power unto
itself. Hence, it is related to persuasion, bargaining as well as capitalizing on
popularity (Neustadt, 1960). The general theory of presidential signalling is the
“underlying doctrine[s] of government” and the “transformation” of the study of
the presidency and is concerned with institutional practice, political authority and the
exercise of presidential power and influence.
Foundational political science research suggests that consumers and markets react to
presidential rhetoric because it is assumed he has an informed opinion, “[. . .] given the
president’s unsurpassed resourcesfor taking the pulse of the economy, with the Departments
of Commerce, Labor, Treasury [. . .] regularly providing him with information” (Roundtree,
1995, p. 330). Further, the information asymmetry that the president possesses is a function
of information being filtered through the massive executive branch bureaucracy. For an
item to get on the president’s agenda, it must clear several obstacles to get to the White
House, and the president will only discuss the timeliest and pertinent (Light, 1999). For
example, the most important agenda items make their way to the president’s State of the
Union Address, which is the statement of legislative priorities (Light, 1999) and a stable
theme of every presidential address is economic policy (Kessel, 1977). Favourable mention of
a policy gives visibility to it and confers presidential backing of it (Kessel, 1974).
MRR Data
To properly collect, code and analyze presidential signals as they relate to market
responsiveness, data was used from two primary sources and a software application was
created uniquely for this project. For presidential signals, an electronic file of the Public
Papers of the President of the USA provides the most thorough and comprehensive
information of any president and will be used to examine all signals that the president
makes regarding financial conditions. Each Public Papers contains the papers, speeches and
public remarks of the President of the USA that were issued by the Office of the Press
Secretary during the specified time period. The Public Papers of the President for this study
was used from 1981 to 1999, from President Reagan’s Inaugural, to December 31, 1999, the
last year of the Clinton Public Papers, as this is all that is available. A total of 5,764
messages were identified, varying wildly by subject, scope and substantive importance,
ranging from President Reagan’s inaugural to President Clinton’s farewell address.
All prepared and unprepared statements, proclamations, etc., that President Reagan,
Bush and Clinton made about the economy, whether they are positive, negative, neutral,
intended or unintended, verbal or written, were coded, because investors are interested in
capitalizing on profit opportunities no matter the setting: press conferences, Q and A
sessions with reporters, radio addresses, addresses to joint sessions of Congress, addresses
to the nation and announcements of economic programs. In other words, every time the
president says something about the economy that has been recorded by the Public Papers, it
will be included in the analysis.
An electronic file containing the Public Papers of the Presidents was obtained from the
Western Standard Publishing Company that contained the Papers through 1999 where the
data ended. A software application was designed uniquely for this project. This application
allowed us to do keyword searches, as well as collate and rate the keywords. The first tool,
the RTF (rich-text format) document parser, reads through (parses) extremely large RTFs of
President Reagan, Bush and Clinton’s Public Papers of the President of the USA, and
isolates publication year, publication date within that year, the publication title (President’s
Remarks at a News Conference, for example) and the paragraphs that belong to the
particular title. President Reagan’s page count from 1981 to 1988 was 18,120, President
Bush’s page count from 1989 to 1992 was 10,512 and President Clinton’s page count from
1989 to 1999 was 22,906.
The only accessible file format for this project is RTF. Therefore, the parser was
designed to identify the RTF formatting tags and the document titles, subtitles and date
range components. After completing the initial parsing, a primary database storage
mechanism was created, storing the following parsed fields: author information; date range;
publication date; publication title; and paragraph text. The parser creates an offline
database replica as it searches through the presidential papers. After the coding was
finished, the offline database was moved to a relational database system. Initially, the
database used was Access 2003, but was migrated to Oracle database technology, to take
advantage of its natural text search engine.
The second tool provided a visual front-end on the primary database table structure.
This application was designed to load the documents and to collate them in a tree list
control. The tree list control allowed the researchers to select documents by author and
presidential year. The selected documents are displayed in an RTF-enabled document view
window. The application also provides access to keyword search functionality and
advanced keyword search methods. The basic keyword search operation allows the user to
search the approximately 51,500 pages for the keywords that are of interest. Documents that
match are returned into a separate tree view control. The organization of this control is very
similar to the standard document viewer. The main difference is that this view allows us to Empirical test
then rate the discrete paragraph of the entire speech, executive order, proclamation or press of signalling
conference as a whole. These ratings are then stored in the database and can be used in post-
analysis operations.
theory
The final component allows the researchers to then plot financial market data from the
Dow Jones Industrial Average, the Dow Jones Composite Index and the NASDAQ taken
from the Wall Street Journal. This operation is linked to the keyword searches to ensure that
the data pulled for plotting matches the currently viewed and rated documents. The Dow
Jones Industrial Average is defined as a market index composed of 30 large cap (large cap,
or market capitalization, is the market price of a company, calculated by multiplying the
number of shares outstanding by the price per share, such as Coca-Cola, General Electric
and Proctor and Gamble). The Dow is the best-known indicator in the world, in part, because
it is old enough that many generations of investors quote from it and because the US stock
market is the most valuable financial market in the world.
The NASDAQ market is a computerized system established by the National Association
of Securities Dealers, representing over 600 securities dealers, trading more than 15,000
issues. The Dow Jones Composite Index is a stock index composed of 65 prominent firms,
which include every stock from the Dow Jones Industrial Average, the Dow Jones
Transportation Average and the Dow Jones Utility Average. Primarily made up of large
market capitalization stocks, with a few mid-cap and small-cap stocks included, 56 of the 65
components are traded on the New York Stock Exchange, with the other nine coming from
the NASDAQ.

Presidential signal categorization

Our research explored in greater detail signals and whether the signals were good, bad or
neutral as management scholars are investigating whether top management team
representation at an IPO is a good signal, whether a weak board of directors is a bad signal,
etc. First, we had software engineers design a software application specifically for our
research. We supplied key words from past research, and the software application would
sort through over the 51,500 pages of information and could include the publication year,
date and title. The page count for Reagan (1981-1988) was 18,120, Bush (1989-1992) was
10,512 and Clinton (1989-1999) was 22,906. The results were then categorized by two
separately coding independent graduate students identifying signals that were positive,
negative or neutral (see tests for inter-rater reliability in the “Inter-rater Reliability” section
below).
Positive signals are defined as optimistic economic news, initiatives, proclamations, etc.
that the market would react favourably, signalled during a given day by the president for
the first time. Negative signals are defined as new negative economic news, proclamations,
sanctions, etc. that the market would react unfavourably, signalled during a given day by
the president for the first time. We also control (discussed in more detail later) for every
influence that could affect the volatility of the stock market based on the finance/accounting
literature. Hence, any abnormal volatility would be because of presidential signalling.
Besides the Economy, Deficit, Inflation and Interest Rates keywords which we used from
past research, other keywords that were believed to be significant because of their impacts
on financial markets were quickly dropped from the analysis. Other keywords were
considered, such as “weakness”, “economic growth”, “economic conditions”,
“unemployment”, “earnings”, “corporate earnings”, “commodities” “housing market”, “oil”
and “unemployment”, but these were dropped because those keywords were used too
infrequently, not at all, or were quickly determined as not relevant to the analysis. For
MRR example, the phrase “housing market” was uttered by President Reagan only nine times in
eight years, President Bush did it 16 times in four years, particularly in 1992 when he was
running for re-election and trying to convince the American people that his economic
programs were working.
Also, “bonds” was dropped because so many of the isolated words referred to bonds of
friendship; “debt” was dropped because so many were “debts of gratitude”, “debt that can’t
be repaid”; “bond market” – used too infrequently to make a difference, “corporate earnings”
and “strength/weakness of the dollar” – not used by all presidents and “earnings” – because
there were very few references to financial earnings, but rather as personal earnings in
terms of wages. President Clinton spent considerable time discussing the “global” economy,
“international” economy or the “new” economy.
When certain words are analyzed out of context of the US financial markets, there will be no
effect and will be coded as a having No Value. For example, President Reagan mentions on
November 11, 1983 that the Japanese “economy” will soon pass the Soviet Union’s to become
the second largest on the planet, and that signal is coded as having No Value. And because the
signals are coded chronologically, the coders can distinguish between those signals very easily,
because the president (as just discussed), after the initial signal, uses the same phrase again and
again throughout the day and next several days. Also, if the president is referencing a historical
fact, that is coded that as No Value as well. For example, President George H.W. Bush, during
his re-election campaign of 1992, mentioned over 50 times that during the Carter
administration, inflation was at 15% and interest rates were at 21%.
Appendices 1 and 2 explain the keywords and give examples of positive, negative,
neutral and no value statements made and the number individually.

Inter-rater reliability
We used two independent coders, separately coding the data, blind to each other, as to
whether the signal was positive, negative or neutral as this is perceptual data. We
subsequently compared their results for reliability. Our empirical tests suggest acceptable
inter-rater agreement (Lombard et al., 2002). The two coders’ matched agreement result was
79.29%. Our results indicate that agreement between the two coders was “substantial” (to
compare, 81% is considered “nearly perfect”). Hence, the results indicate that our coders
were able to identify positive, negative and neutral signals appropriately.

Controlling for macroeconomic announcements

The marketplace is inundated by signals from various sources and we attempted to control
as many as possible, and hence used the research literature to control for each of the possible
alternative signals that could affect our research, both announcements and industry cycles.
Research suggested that we control for the following announcements: consumer price index
(CPI), producer price index (PPI), industrial production and capacity utilization (IPCU), new
residential construction, productivity and costs, gross domestic product (GDP), employment
situation (Unemp), personal income and outlays (PI) and Federal Open Market Committee
(FOMC) meeting dates. Our controls are considered the most important announcements
controlled for by previous literature that may affect volatility on the financial markets. We
collected the control data from the website of Federal Reserve Bank of St. Louis and FOMC
meeting dates from Gürkaynak et al. (2005). Macroeconomic variables are used as controls,
in line with past research, as determinants of market return volatility (Onan et al., 2014).
Engle and Rangel (2008) find that volatility in macroeconomic factors such inflation, GDP
growth and short-term interest rate are critical explanatory variables that increase volatility.
Engle and Rangel (2008) find that even at short horizons, macroeconomic announcements Empirical test
play a significant role in volatility predictions. of signalling
Prior research also suggests that business cycles could affect signals as professional
investors react differently to the exact same set of signals in differing business cycles
theory
(Blanchard, 1981; McQueen and Vance Roley, 1993). During market expansion for
example, PPI and CPI indicators effect the stock market during expansion but do not do
so during inflationary periods (Andersen et al., 2007). We control for business cycles with
data from the National Bureau of Economic Research (NBER). There are three recession
periods in our sample period (January-June 1980; July 1981-January 1983; July 1990-
March 1991). The control variable information is summarized in Table 1.

Empirical tests
Our research seeks to explore how signals will affect the stock market based upon signalling
theory. An ARCH(1) model is not able to capture the persistence in volatility fully and
GARCH(1,1) models are shown to capture volatility clustering in financial asset returns data
better (Hansen and Lunde, 2005). This model can be written as follows:

Rt ¼ l þ et

X
p X
q
r2t ¼ x þ ai e2ti þ bj r2tj (1)
i¼1 j¼1

x
x ¼
1ab

Announcement Source Frequency Timing

Real activity
Industrial production FRB Monthly On or around the 16th of the month
Capacity utilization FRB Monthly On or around the 16th of the month
Employment situation BLS Monthly The first Friday of the month
Personal income and outlays BEA Monthly 4-5 weeks after month’s end
Productivity and costs BLS Quarterly Approximately five weeks after
previous quarter’s end
GDP BEA Quarterly Three months after quarter ends
Prices
Consumer price index (CPI) BLS Monthly Last Tuesday of the month
Producer price index (PPI) BLS Monthly Second or third week of the month
Forward looking
New residential construction CB Monthly On or around the 17th of the month
FOMC meeting minutes FRB Every six week
Recession Start Duration
January1980 6 Months
July 1981 16 Months
July 1990 8 Months

Notes: This table reports release timing, the institution that makes the release and the frequency for the
macroeconomic announcements. FRB, Federal Reserve Board; BLS, Bureau of Labor and Statistics; BEA, Table 1.
Bureau of Economic Analysis; CB, US Census Bureau Control variables
MRR where Rt is the return on an asset at time t; « t is the forecast error or shock; s t is the
conditional variance of Rt; v , ai and b j are the parameters; and p and q refer to the number
of lags of shocks and conditional variances, respectively.  v is the constant long-run
volatility of the return process.
To take into account the leverage effect or asymmetric effect of return volatility, we used
GJR-GARCH (Glosten et al., 1993). To capture bad or good news in stock returns, the
financial economics literature commonly uses the GJR-GARCH model. Hence, we estimated
all the regression models using the GJR-GARCH model. The variance equation is defined as
follows:

X
p X
q
r2t ¼ x þ ðai þ ci Iti Þe2ti þ bj r2tj (2)
i¼1 j¼1

where Iti is an indicator for negative e2ti , that is:

Iti ¼

1 if « ti < 0
0 if « ti  0

s t is the conditional variance of Rt; g i, ai and b j are the parameters; g i captures the
leverage effect; and p and q refer to the number of lags of shocks and conditional variances.
We first ran an ARCH test as the presence of ARCH effects must be identified, as without
the ARCH effects, in stock returns, further modeling may bring bias and provide unreliable
results. Because the p-value is <0.05, we reject the null hypothesis and conclude the
presence of ARCH (1) effects. There are two preconditions that must occur for using GARCH
modeling: stationary series and volatility clustering. We can use the Augmented Dickey–
Fuller (ADF) test to confirm our expectation that SP500 index return is a stationary series.
Based on the results of this test, we reject the null hypothesis that asserts non-stationarity
and conclude that index return series is stationary. Next, we checked whether there is
volatility clustering in the time-series plot of SP500 returns and observed that high
fluctuations are followed by high changes and low fluctuations are followed by low changes.
Hence, the two preconditions of GARCH modelling are satisfied.
See Table 2 for the results; Model 1 for the Positive and Neutral signals that the president
sends to the market; and Model 2 includes dummies in the variance equation for the
Negative and Neutral signals that the president sends to the market. In these two models,
positive and negative signal categories aggregate signals over each category. Model 3 uses
separate dummies for positive and negative presidential signals on economy, deficit and
inflation/interest rates. All three models include control variable dummies in the conditional
variance of equation (2). We also use AR(1) term in the return series of equation (2) to
account for the empirically documented non-synchronous trading effects. Business cycles
are represented by a binary variable with days in recession period taking one. We report
only the dummy variables with statistically significant t-values. We also ran GARCH and
EGARCH models and the results are similar.

Discussion of the results

Our research found a direct correlation between signals from a credible signaller to a direct
reaction from active professional receivers (which supports the EMH), supporting signalling
 Model 1 Model 2 Model 3
Empirical test
Coefficient t-value Coefficient t-value Coefficient t-value of signalling
theory
Constant in mean 0.053 4.599 0.052 4.616 0.051 4.541
Constant in Var. 0.022 4.764 0.023 4.911 0.020 4.747
ARCH(1) 0.025 4.858 0.025 4.928 0.025 4.956
GARCH(1) 0.921 213.890 0.921 220.484 0.921 221.386
GAMMA(1) 0.069 12.351 0.070 12.592 0.069 12.436
All positive 0.018 1.489
All negative 0.066 3.935
All neutral 0.015 3.668 0.016 4.150
Economy neutral 0.016 3.353
Economy negative 0.073 3.730
Inf neutral 0.006 1.044
Controls
Unemp 0.129 4.884 0.129 4.890 0.135 5.097
PPI 0.087 3.209 0.050 1.587 0.045 1.372
GDP 0.136 4.566 0.134 4.567 0.132 4.540
Prod. costs 0.085 3.212 0.075 2.961 0.090 3.370
Recession 0.013 3.043 0.012 2.769 0.013 2.962
Table 2.
Notes: This table presents results for the GJR-GARCH estimation. Model 1 includes only the positive and GJR-GARCH
neutral signals that the president sends to investors; Model 2 includes only the negative and neutral signals estimates for S&P
that the president sends to the market; Model 3 includes all the specific presidential signals. Macroeconomic
announcements and business cycles are included as control dummies. We report only the variables with 500 index returns on
statistically significant t-values. Full tables are available upon request. The return series is the S&P 500 presidential signals
Composite Index daily returns. Sample period is 1981-1999 and controls

theory used in management research. We controlled for all possible variables found in past
research that may confound the relationship, and because of the perceptual nature of the
data, we ascertained its validity through blind coding and subsequent inter-rater reliability.
In summary, Negative signals have the greatest effect on the volatility of the S&P 500 Index.
Positive signals also increase volatility in the market as with any other new information
arrival but the effect is substantially less compared to the impact of negative news. Neutral
signals decrease market volatility.
In agreement with the literature, investors are risk-averse, so negative signals should
cause the greatest volatility in the stock market. Also, past research suggests that that
public news focuses on negative news and will expound upon its negativity. Investors are
more greatly influenced by negative news because of the potential loss (as opposed to a gain)
and will sell to avoid a loss position and rebalance their portfolio. Positive signals creating a
reaction from professional receivers also are in line with the literature. Investors are
attempting to find the smallest advantage over their competitors, and with new positive
news will seek industries/firms that may benefit from the new signal they received. Finally,
any “nothing new” or neutral signals, signal to the professional investors that neither good
nor bad news is forthcoming, so they do not react, and thus volatility decreases.

Summary and conclusions

Signalling theory is a powerful theoretical foundation in management research as it assists
in explaining decisions by managers. As managers are overwhelmed by the amount of
information available, and are boundedly rational, they often rely on pertinent signals to
assist in their decision-making. Although there has been much research using signalling
MRR theory, our research directly tests signalling theory by assessing a signal sent, and then
reaction from the receiver. Our research adds to the literature by exploring how investors
behave when an individual who has access to privileged information (in our research, the
president) presents it to the marketplace. Information asymmetry with regard to what
the president knows versus the marketplace is high. The president also can provide clues in
the information they present with regard to possible policy changes to the marketplace.
Investors listen and react to new information to the marketplace based upon the efficient
market hypothesis, and our results indicate that an important source of information is the
president.
The results of our empirical study of over 51,000 pages of presidential announcements
over nearly 20 years of presidential signals suggest that signalling is powerful, and the
marketplace does listen and reacts to the information. Our results indicate that negative
signalling affects volatility the greatest, in agreement with theory, as investors are risk-
averse and will react more strongly to negative news. Also, the market response is expected
to be more profound following the negative signals from a trusted source about the state of
the economy, as research suggests the media emphasizes negative news stories (Bennett,
2003).
Positive signalling also affected stock market volatility. This finding is in line with the
well-known leverage effect in the literature and the arguments of Epstein and Schneider
(2008). Neutral presidential communication decreases market volatility. These findings are
intuitive, considering that key quality signallers have the advantage of information
asymmetry and when sending a signal to the markets that is neither positive nor negative
suggests that all is “par for the course” or no bad/good signals are necessary at the time.
Our research contributes to the literature in a number of ways. First, we extend the
literature on signalling by directly testing the power of a signal to a marketplace reaction.
Our research suggests that when a key quality signaller sends a signal that focuses on the
economy, then receivers who are actively seeking credible information due react. In
accordance with prior research, we also separated the economic signals into categories of
positive, neutral and negative. Our results illustrate not only the power of signalling, but
also the message and intent were carefully observed as reactions differed.
We responded to past research calls for more exploration of negative signals to the
marketplace and receivers’ reactions. We explored negative signals and, in line with
previous research, found that receivers reacted greater than that of positive signals. We also
addressed the gap in the literature with regard to the temporality of signals. We reviewed
signals in line with the efficient market hypothesis, and reviewed a signal and an immediate
reaction by receivers. Finally, the construction of our methodology to control for all known
variables in the literature assists in the signalling literature gap with regard to confounding
variables that might obfuscate the focus variable.
Our research used both signalling theory and the efficient market hypothesis as the
research was cross-disciplinary. We contributed to signalling theory as the underlying
foundation is that receivers will react when the signaller is credible because of information
asymmetry. We also furthered the efficient market hypothesis as the theory states that new
information will be reacted to by the marketplace, as our results indicate.
Practitioners can also take heed of our research, as they can strategically use signals
from key quality signals and act appropriately. Top executives can learn from this research
as the credibility of the message, and the credibility of the signal sender is of importance.
Also, the method of delivery of the signal must be ascertained, as our research used active
receivers, and often the receivers themselves must be sought and the delivery to them must
be appropriate.
Implications for practitioners Empirical test
Our research directly tests signals from a decision maker signal to immediate reactions by of signalling
professional investors, and we find that new market signals do indeed have a reaction. This
is of importance for practitioners, as CEOs can also effect market reactions and purposefully
theory
manipulate the market. For example, trustworthy published financial statements will
influence financial investors (Zhang and Wiersema, 2009), creating diversity in the board of
directors suggests CSR to various stakeholders (Miller and Triana, 2009), and various
signals will increase brand value and attract the top employee talent (Celani and Singh,
2011). Our research suggests that CEOs have the power (if they have the perceived
credibility by receivers) to influence the marketplace based upon credible actions and
messages sent. We have included some positive and negative signals by CEOs to the
marketplace as an example.
Presidential statements are an important research area as presidents are continuously
making announcements and research suggests that news from a reliable source will lead to
more portfolio rebalancing. Illeditsch (2011) argues that when investors receive information
that is difficult to process, investors’ desire to hedge ambiguity leads to excess volatility. We
argue that information from the president is an important and reliable source of information
and affects market place volatility with negative and positive presidential signals leading to
higher volatility. The result that a neutral signal from the president reduces market
volatility would suggest that this type of information reassures investors that there is
nothing to add to their already acquired market information.
Our empirical findings indicate that information from a reliable source, in this case the
president, does affect market volatility which is an important investment consideration for
financial managers. Our research suggests that institutions and other financial participants
involved in the stock market should take heed of presidential announcements and the
resulting market volatility. Professional investors are exposed to large amounts of data and
information daily and presidential announcements will confirm, heighten or contradict their
privately held information with resultant heightened or lessoned volatility. As the
reputation of the president is of importance, the quality of presidential rhetoric should be
very high. As there are many stages whereby different information is expunged on its way
to the president, only the key information is elicited by the president to the populace, thus
enhancing its value.

Limitations to the research

Our research attempted to test signalling theory from a direct signal by a credible source to
a direct reaction by professional investors as a support for continued use by management
researchers. Signalling theory has been used in management research to understand
information asymmetry; for example, in the entrepreneurship literature, it is used to
examine board characteristics, top management team characteristics, founder involvement,
institutional activism and angel investor presence (to name a few) to entrepreneurial success
and the ability to raise capital (e.g. Miller and Triana, 2009; Plummer et al., 2016; Boyd et al.,
2010). Yet, signalling theory still should be used with the knowledge that so many other
variables can still confound a direct relationship proposed in our research. An outstanding
top management team with a credible board of directors may signal superior quality, but
other factors such as market climate, the product itself and past performance must also be
included to assure a correlation.
Our research (though included nearly 20 years), because of the many influences that
occur in the marketplace and in management practice, may not be entirely reproducible by
CEOs and their signalling. Past research does suggest that other powerful actors can
MRR influence the marketplace, as the federal research board chairman also has an impact on the
marketplace with their signals (Bernanke and Kuttner, 2005). However, competitor and
the marketplace itself may convolute individual firm signals, and the media used to deliver
the message may be lost in the vast plethora of market signals.

Note
1. Some recent studies are Green (2004), Bernanke and Kuttner (2005), Boyd et al. (2005), Evans and
Lyons (2008), Wongswan (2009), Chen and Gau (2010), Hautsch et al. (2011), Evans (2011) and
Elder et al. (2012).

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Appendix 1 Empirical test
of signalling
theory
Keyword Description

Economy The total wealth and resources of the USA in terms of the production and consumption of goods
and services
Deficit When government spending exceeds the receipts (tax revenue) it receives in a given year. The
total accumulation of these deficits is the national debt. Governments finance deficits through
the bond market
Inflation An increase in the overall prices of goods and services in an economy and the inflation rate is
the percentage change in the consumer price index – a measure of the overall cost of the goods
and services bought by a typical consumer – from one period to the next, measured monthly
Interest The supply of money into the system is under the partial control of the Federal Reserve System
rates as it manipulates the federal funds rate through the open-market operations. As interest rates
increase, economic actors should borrow, consume and invest less; as they decrease, economic
actors should borrow, consume and invest more Table A1.
Keyword
Source: All definitions taken from Mankiw (2007) descriptions

Appendix 2. Example paragraphs of positive, negative, neutral and no value signals

from Public Papers of William Jefferson Clinton
Each example reflects the application’s ability to search and find positive signals from President Bill
Clinton, for our keywords of interest, Economy, Deficit, Inflation and Interest Rates

Positive
8/1/96: Good morning. A strong and growing economy is the best way to offer opportunity to every
American who is willing to work for it. Today we received fresh news that our economy grew at a strong
4.2% rate in the last quarter. This robust growth, 4.2%, is touching the lives of all our people with 10
million new jobs, low unemployment, and inflation in check. This is good news for America and more
evidence that our economy continues to surge ahead and that our economic strategy is working.

Negative
3/19/93: This [health care crisis] is a devastating blow to our efforts to reduce the deficit. If you want
us to bring the budget into balance, you must insist that after we pass this budget, we move on to
find a way to bring health costs in line with inflation and provide a basic package of health care to all
of our people. By the end of the decade we’ll be spending 20% of every dollar, 20 cents on the dollar,
on health care. And none of our competitors will be over a dime, and we will be in a serious hole in
terms of trying to be competitive. We also cannot balance the budget.

Neutral
10/6/99: You look at what happens to these countries that try to hide their money; people still get it
out. Interest rates are set in a global economy. If we get America out of debt, it means that all the
Americans can borrow more cheaply. If the Government is out of debt, it means lower interest rates
for businesses in this country, for home loans, for car loans, for college loans. It means more jobs and
higher incomes.
MRR No value
12/17/96: During the past 12 months, [the NATO-led Implementation Force] separated and ensured
the demobilization of former warring factions. It provided the secure conditions in which democratic
elections could be held and the reconstruction of Bosnia’s shattered economy could begin.

Appendix 3

President Deficit Economy Inf&Int Rates

Pos Neg Ntrl Pos Neg Ntrl Pos Neg Ntrl

Reagan 36 14 422 85 38 658 30 15 741

Bush 10 8 196 70 52 340 20 13 139
Table A2. Clinton 42 7 599 53 53 887 24 8 704
Number of positive Notes: This table presents summary statistics of the number of times President Reagan, Bush and Clinton
and negative signals sent a positive and negative signal to the market, using keywords Deficit, Economy, Inflation and Interest
to the market Rates, from January 1981 to December 1999

Appendix 4. Examples of CEO comments

Good signal
“Sales have far exceeded production, and production has been pretty good”, CEO Elon Musk of Tesla
said. “So, we’re actually doing well, and we have a decent shot at a record quarter on every level”
(The Verge, 2019), Tesla’s stock price increased.

Bad signal
“The acquisition of Red Hat is a game-changer (IBM purchased Red Hat). It changes everything
about the cloud market”, said IBM CEO Ginni Rometty (IBM press release, October 29, 2018). IBM
stock tumbled to a two-year low after the company announcement. Ms. Rometty is often seen as not
credible as revenues have dropped by $28bn during her tenure and her message had a negative
reaction.

Bad signal
David Mills, CEO of Ricoh Europe, said “The refrain that “print is dead” is utterly misguided. New
printing technologies are helping business to fundamentally transform their operations” (Ricoh,
2018). Stock price dropped immediately as investors reacted to this as a bad signal, as it is apparent
that “print is dead”.

Good signal
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of
the economic deceleration, particularly in Greater China. Despite these challenges, we believe that our
business in China has a bright future” (January 2, 2019 Apple Press release from CEO Tim Cook).
Tim Cook is seen as a credible CEO and stock immediately increased.
Good signal Empirical test
“Beyond the planned changes to our portfolio, we aim to improve our profitability and productivity of signalling
with a series of efficiency and structural measures. Touching all areas of the company, these
measures will free up resources for innovation and growth” (Bayer press Release by CEO Baumann,
theory
2018). Stock increased.

Corresponding author
Timothy Kiessling can be contacted at: timothy.kiessling@sabanciuniv.edu

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