Tyrone Schiff 1 Holding a Share in Achievement Introduction All around the world, economic activity takes place through

the purchase and sale of publicly traded companies on various exchanges. In London, people trade on the FTSE, and in China, trading takes place on the Schenzen Stock Exchange. These exchanges, or markets, are critically important to their respective country, because they act as a barometer of economic prosperity. In the United States, stock in companies is generally traded on one of two exchanges, the New York Stock Exchange or the NASDAQ. There are literally thousands of companies to choose from on either one of these exchanges (NYSE, 2007). Every day, people invest exorbitant amounts of money in hopes that their company’s stock will climb. Yet, there are terrible risks associated with investing in the stock market as well. Stock prices move up or down every trading day, which means that an investment is just as likely to go sour as it is to soar. Individuals choose to invest in the stock market, instead of placing their money in a fixed-interest savings accounts or government bonds, because they want to grow their assets faster and larger. Bonds and savings accounts typically offer a constant interest rate, whereas, stocks in companies can expand or contract enormously in a significantly shorter amount of time. The stock exchange seems to follow the maxim, “with great risk comes great reward,” yet, simultaneously, there exists substantial downside if you choose incorrectly. As a result of wanting to be right more times than wrong, economists and pundits have tried to establish methods to “predict” the future progress of a stock. Some methods include technical analysis; in which most of the scrutiny is based on the stock’s chart over time, and fundamental analysis; in which analysts look at financial statements, management techniques, and competitive advantage of a company. However, the problem persists; sometimes they are

Tyrone Schiff 2 right and sometimes they are wrong. This is by no means the only technique in assessing the economic future. There are also economic indicators that look at the market more holistically than just a single stock price, which try to predict the overall movement of the economy. An abbreviated list of these indicators include the Consumer Price Index (CPI), Producer Price Index (PPI), the unemployment rate, and interest rates. While these economic indicators are particularly useful in understanding the future movement of the economy, they do little in predicting the outcome of individual stocks. The trick, therefore, is to find a consistent indicator that is measurable and reproducible that relates directly to a particular stock. It is my belief that achievement motive imagery holds the key to unlocking this indicator. More specifically, the achievement motive imagery contained within a company’s annual “Letter to the Stockholder,” may have correlation to the future price of the stock in a company. The purpose of this paper will therefore be to report my own findings along with plausible reasoning for why this may be the case. Prior Research This study would not be possible without the empirical evidence and proven methods that have already been gathered by Professor David G. Winter. He was instrumental in developing the process of scoring texts for power motive imagery, affiliation motive imagery, and achievement motive imagery. In particular, previous studies have shown, especially those done by David McClelland, that levels of achievement motive imagery in texts lead to varying degrees of economic success (McClelland, 1961). McClelland’s study revolved around the achievement motive imagery found in children’s books in the 1920’s and 1950’s and their impact on various economic factors (McClelland, 1961). He was able to prove that those countries that had higher achievement scores in their children’s stories lead to greater economic growth (McClelland,

Tyrone Schiff 3 1961). He looked at factors such as electricity produced in kilo-watt hours per capita and national income in international units per capita (McClelland, 1961). With this as a basis, I wanted to explore if there were other economic factors that may be the result of achievement motive imagery. Hypothesis Before starting my research and analysis, I had some ideas as to the type of correlation that may exist between the stock price of a company and the amount of achievement motive imagery contained within the annual “Letter to the Stockholder.” I expected there to be a correlation between high achievement motivation and an increase in the stock price. This runs in sequence with the findings of McClelland that high achievement is representative of economic success (McClelland, 1961). Furthermore, I anticipated the annual report to have immediate and short-term impact. This means that from the time the “letter” was issued to the public, it would have a quick effect on the stock price and would do so for no more than a year. Shareholders would not respond to the “letter” for longer than a year, because a new one would come out in the following year. It should be understood that this was a largely comparative study of different publicly traded companies. Thus, I expected those company’s “letters” who were comparatively lower in their achievement motive imagery to perform worse than those with comparatively higher achievement motive imagery. Therefore, I additionally expected there to be a continuum on which achievement motive imagery could be plotted. Companies on the higher end of the continuum would reap greater economic success than those on the lower end.

Tyrone Schiff 4 Definitions An annual report is compiled by a company and distributed to its shareholders. It contains financial information about the company’s performance over the past fiscal year. In addition, it may also include the company’s mission statement, invitation to the annual general meeting, statement of directors' responsibilities, and the chief executive officer (CEO) and chairman’s statements, commonly referred to as the “Letter to the Shareholders.” This “letter” usually contains a summary of where the company has been over the past year, and where it intends to go in the future. It will often warn the shareholders about the uncertain nature of their statement, well exemplified by this disclaimer found in Caterpillar Inc.’s Annual Report, “Information included in this Management’s Review is forward looking and involves risk and uncertainties that could significantly impact expected results” (Caterpillar Inc., 1999). There were five different companies that were used in this study. Caterpillar Inc. is primarily involved in making construction and mining equipment (Caterpillar, 2007). They are over 80 years old and are the largest business in the machine and engine industry (Caterpillar, 2007). General Electric (GE) is a large conglomerate business composed of various sectors, such as: commercial finance, healthcare, industrial, infrastructure, money, and media (GE, 2007). They currently own and operate NBC (GE, 2007). Merck & Co., Inc. (Merc) is a pharmaceutical research institution that develops new vaccines and medicines (Merck, 2007). The Walt Disney Company, perhaps best known for their animated characters like Mickey and Minnie Mouse, are a comprehensive entertainment company (Disney, 2007). They are made up of four core businesses which include Disney Studios, parks and resorts, consumer products, and media networks (Disney, 2007). Finally, the Intel Corporation is a leading innovator in technology, primarily focused on the creation of microprocessors used in desktop and laptop computers

Tyrone Schiff 5 (Intel, 2007). According to Google Finance, all of these companies are in different sectors of the US economy (Google Finance, 2007). To be an owner of stock in a company means to partially own that company (InvestorGuide, 2007). Ownership entitles the individual to have voting rights on issues that affect the company (InvestorGuide, 2007). For each stock, or share in a company owned, the owner is entitled to one vote. Companies typically distribute millions of shares in their stock. Additionally, the stock price reveals the value of the company. If the value of a company that you are invested in goes up, then your investment will similarly gain value. On the most basic level, stock prices are dictated by the laws of supply and demand (TradingDay, 2004). Methods Five companies were selected to take part in this study. The companies selected could either be from the same economic sector or from different ones. In this study, companies from different sectors were used in order to evaluate the impact of achievement motive imagery across the entire economy. The sectors included in this study were capital goods, conglomerates, healthcare, services, and technology (Google Finance, 2007). The companies were picked for their relative size within their sector, as well as, their generally established corporate identity. Chances are that most people at the University of Michigan have had some sort of interaction with at least one of these companies, if not all of them. Once the companies were decided upon, an initial starting date from which to monitor the stock price had to be chosen. Though the original stock price is critical in examining the progress of the company over time, for this study, the start date was mostly arbitrary. It did relate, however, to the annual reports that were chosen. Each one of the company’s 1998 Annual Report was used in this study. Knowing that annual reports reflect information and ideas about the

Tyrone Schiff 6 previous year, the starting date of Monday January 4, 1999, was decided as the initial price for the stock. This happens to be a good opening date for the stock price, because it is the start of a new year and all future performance from this date will be summarized in the next year’s Annual report. The end date was chosen to be Tuesday January 3, 2007, because this allows for eight full years of market activity. The historical stock prices of each company were then compiled in order to watch its growth or reduction. The prices were retrieved using Yahoo! Finance. In this study, the company’s stock price was evaluated on a year-to-year basis. Therefore, the stock prices for each company at the beginning of January of the subsequent years following 1999 were used as reference points. Two separate categories of measurement were then established. The first measurement was of the initial stock price in relation to the different reference points. Thus, the 1999 price was held constant compared to 2000, 2001, etc., for percent increase/decrease. This measurement expresses the stock prices’ overall percentage change over the eight year period. This is equivalent to investing in 1999 and leaving your investment for eight years. The second measurement looked at the growth or reduction of the stock over a single year. In this case, 1999 was compared to 2000, 2000 was compared to 2001, 2001 to 2002, etc. Again, for each company the percent increase/decrease was recorded. This is equivalent to investing for a year at a time. Following this, the “Letter to the Shareholders” contained within each company’s 1998 Annual Report was coded for achievement motive imagery using the abridged scoring in “running text” provided by Professor Winter. The amounts of achievement images in each document were then counted. By using the “word count” tool in Microsoft Word, the amount of words in each company’s “Letter to the Shareholder” was counted. By dividing the total achievement images

Tyrone Schiff 7 for each document by the number of words in each document, and then multiplying by 1,000 gives a rate of images per 1,000 words for each document. Results After performing the achievement motive imagery coding of the 1998 “Letters to the Shareholders,” I am able to report the following set of information. Caterpillar Inc. had the highest rate of 146.59 images/1000 words. Second was the Intel Corporation with 88.76 images/1000 words. Third was General Electric with 84.28 images/1000 words. Fourth was Merck Co., & Inc. with 83.07 images/1000 words. The Walt Disney Company was last with a rate of 68.21 images/1000 words. Therefore, I would expect to see that somewhere during the 1999 to 2007 time period, Caterpillar would have the highest percent increase, followed by Intel, GE, Merck, and Disney. This order in percent increase correlates to the growth seen in all five companies between the year 2001 and 2002. In this year, Caterpillar’s stock grew by 17%, Intel fell by 5%, GE fell by 17%, Merck fell by 26%, and Disney fell by 30%. Results are summarized in Figure 1.

Figure 1 Achievement Score Stock Price: ‘01 Stock Price: ‘02 % Change ‘01-‘02 Caterpillar 146.59 19.06 22.30 +17.00 Intel 88.76 34.53 32.78 -5.07 GE 84.28 38.81 31.85 -17.93 Merck 83.07 62.05 45.56 -26.57 Disney 68.21 28.65 20.03 -30.09

Discussion As you can see, during the year of 2001 to 2002 there appears to be a correlation in the achievement motive imagery scores and the relative move of each company’s stock price. The

Tyrone Schiff 8 first thing to address is that this correlation occurred in the year from 2001 to 2002, which was two full years after the original start date and publication of the “Letter to the Shareholders.” One reason that explains for this delay is a principle in economics called lag time (Burdick, 2006). Typically, lag time is associated with economic indicators like CPI, PPI, unemployment, and interest rate changes. All of these economic indicators take the whole economy into account, and the economy often reacts slowly. Measuring these indicators is easy. According the US Department of Labor, the CPI calculates the, “monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services” (Consumer Price Index, 2007). Figuring out how much these goods have changed does not take a long time, yet the effect it has on the economy can take months to set in. This may be the case with the “letter.” Shareholders may assess what their CEO has to say but may not act on it immediately. However, an even stronger case for why there is a lag time between the “letter” and the period in which there is a correlation between achievement motive and stock price percent change may be due to the very nature of the “letter.” When CEOs and corporate management compile the “letter,” they include a lot of statements that could be described as “forwardlooking” or even “visionary.” Much of the “letter” discusses what is to happen, not what has already happened. Interestingly, one of the five criteria on which to determine achievement motivation is, “Goals or performances described in ways that suggest positive evaluation” (Winter, 1987). Therefore, higher achievement motivation may mean a higher frequency of evaluating goals positively. This positive evaluation that becomes associated with a new initiative will therefore resonate positively in the reader of the “letter.” Remember, the readers of the “letter” are the shareholders. Shareholders could be people just like you and me. Essentially, the shareholders of a company are its greatest allies. Shareholders can act as advocates for the

Tyrone Schiff 9 company, essentially reiterating the positive evaluation that they read in the “letter” and sharing this news with their friends and co-workers. If a majority of people walk away from the “letter” with an overall positive feeling about a future initiative, then this may add to the likelihood of success for that proposed goal. Furthermore, it takes a company a while to fully implement new initiatives. It may even take more time for that company to reap the benefits of the initial goal. All in all, this may account for the two year lag time on the effect on the stock price. Figure 1 reveals that not all, actually four, of the companies in this study had a negative percentage change from 2001 to 2002.This leads me to a further understanding of how the achievement motive imagery score actually relates to stock price. It appears as though the raw score itself means nothing, but only until it is compared with other samples does it gain meaning. This suggests that the achievement motive imagery score does not reflect how the stock itself will perform, but it will tell you how it will perform relative to a basket of stocks. This is the case here. I know 146 is bigger than 88, but I am not sure what impact this difference in score will have on the stock price or percent change exactly. Finally, and perhaps most importantly, what are the implications of knowing that achievement motive imagery may have an effect on future stock price? The significance is both great and small at the same time. As I have noted, the achievement motive imagery score may mean nothing on its own, and therefore, while a CEO or Chairman of the Board is writing the “Letter to the Stockholder” he or she cannot know what the relative scores in achievement motive imagery are across the entire market. Knowing that this correlation may exist however, the CEO or Chairman can improve the company’s chances of success in the future by infusing the “Letter to the Stockholder” with as much achievement imagery as possible. Future Study

Tyrone Schiff 10 There are a lot of different avenues to explore in potential future study on this topic. First and foremost, one will notice that there is no statistical evaluation within this study, only an observation of a correlation. In the future, it would be helpful to add that statistical analysis to provide validity to the findings. In order to show that this correlation exists, this study would need to be performed many more times with even more companies in the sample size. If the relation between achievement motive imagery and relative percent change of the stock price holds, then this will legitimize the correlation even further. Additionally, it would be interesting to evaluate companies from the same sector to see if there are differences in their reaction to achievement imagery. All of the companies used in this study are sizeable; at least above $40 billion in market capital. Perhaps smaller companies that are publicly traded react in a different way to large companies. There may also be more relevance to the achievement motive score than just meets the eye. Perhaps there is a break even achievement motive score that can predict for a minimum of zero percent change over a year. There is still a lot more to be discovered in the relationship between the “Letter to the Shareholders” and achievement motive imagery.

References (2004). Supply and Demand. In TradingDay.com Candlestick Tutorial. Retrieved November 27, 2007, from http://tradingday.com/c/candlesticks/candlesticks4.html.

Tyrone Schiff 11 (2007). All About Intel. In Intel. Retrieved November 24, 2007, from http://www.intel.com/intel/index.htm?iid=homepage+hdr_about. (2007). Common and Preferred Stock. In InvestorGuide University. Retrieved November 27, 2007, from http://www.investorguide.com/igu-article-818-stock-basics-commonand-preferred-stock.html. (2007). Consumer Price Index. In US Department of Labor: Bureau of Labor Statistics. Retrieved November, 24, 2007 from http://www.bls.gov/cpi/. (2007). Corporate Overview. In Caterpillar. Retrieved November 20, 2007, from http://www.cat.com/cda/layout?m=115061&x=7. (2007). Google Finance. In Google. Retrieved November 20, 2007, from http://finance.google.com/finance. (2007). Listed Securities. In NYSE Euronext. Retrieved November 24, 2007, from http://www.nyse.com/about/listed/1170350259411.html (2007). Our Company: GE. In General Electric: Our Businesses. Retrieved November 20, 2007, from http://www.ge.com/company/businesses/index.html. (2007). The Merck Corporate Philosophy – Mission Statement. In Merck Corporate. Retrieved November 20, 2007, from http://www.merck.com/about/mission.html. (2007). The Walt Disney Company. In Company Overview. Retrieved November 24, 2007, from http://corporate.disney.go.com/corporate/overview.html#studio_entertainment. (2007). Yahoo! Finance. In Yahoo!. Retrieved November 20, 2007, from http://finance.yahoo.com/. Burdick, Christopher. (September 26, 2006). Schwab Guide to Economic Indicators: Employment Cost Index (ECI). In Charles Schwab: Research and Strategies.

Tyrone Schiff 12 Retrieved November 26, 2007, from http://www.schwab.com/public/schwab/research_strategies/market_insight/1/4/sc hwab_guide_to_economic_indicators_employment_cost_index.html. Caterpillar Inc. (1999). Inside the Yellow Iron: The Global Competitor (1998 Annual Report to Shareholders). Peoria, IL.: Fites, Donald V., Barton, Glen A. General Electric Company. (1999). 1998 General Electric Company Annual Report. Fairfield, Connecticut.: Dammerman, Dennis D., Murphy, Eugene F., Opie, John D., Welch, Jr., John F. Intel Corporation. (1999). Building a Connected World: 1998 Annual Report. Santa Clara, CA.: Barrett, Craig R., Grove, Andrew S., Moore, Gordon E. McClelland, David., excerpts from “Achieving Societies in the Modern World,” in The Achieving Society, New York: D. Van Nostrand Company, 1961, pp. 63-75, 89103. Merck Co., & Inc. (1999). 1998 Merck Annual Report to Shareholders. Whitehouse Station, N.J..: Gilmartin, Raymond V. The Walt Disney Company. (1998). The Walt Disney Company 1998 Annual Report. Burbank, California.: Eisner, Michael D. Winter, D.G. (1987). Introduction to Scoring Motive Imagery in “Running Text”. University of Michigan.

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