When Upbeat Language Belies Downbeat Results

February 20, 2019

When is good news from corporate managers not really good news? That’s the question Olin researchers address in an award-winning paper that used big data to create a stock forecasting index based on how cheery C-suite executives sound.

The result: When company leaders sound really upbeat, investors might want to clutch their wallets a little tighter.


In “Manager Sentiment and Stock Returns,” Olin’s Xiumin Martin and Guofu Zhou built a model comparing the level of positive or negative messaging from company leaders with trailing stock returns a month, six months, and a year after those messages.

“Our paper proposes a new textual disclosure tone-based manager sentiment measure that contains unique and incremental sentiment information beyond existing investor sentiment measures and has greater predictive power than any other measure.”

After comparing it to a number of other forecasting tools, the researchers found their model “has greater predictive power than any other measure.”

The research began with 11 years’ worth of text from 378,000 investor calls and quarterly and annual reports from 10,000 companies. The researchers applied machine-learning tools to the massive collection of text, gauging how upbeat or grumpy executives were about the economy as a whole or their own company.

As the “level” of positive sentiment increased, trailing market returns tended to decline at a statistically significant higher rate. Martin said the ‘manager sentiment index’ can forecast results for the stock market as a whole as well as the performance of individual firms.

KEY TAKEAWAYS for Managers

  • A review of manager sentiment strongly suggests that when managers are overly optimistic, they tend to overinvest, which negatively predicts stock market growth.
  • The “manager sentiment index” developed in this research “has greater predictive power than any other measure” forecasting stock performance.
  • Investors should be cautious when manager sentiment is overly optimistic about company or market prospects.

“People who read this paper could speculate that CEOs are overconfident in general,” Martin said. “Investors need to be cautious. When the news is upbeat and happy, they need to be really cautious.”

Martin said corporate leaders may tend to overinvest in acquisitions or capital expenditures when they believe everything’s coming up roses. Policy makers could curb that enthusiasm by using interest rates to tighten lending and constrain investments.

The research received “best paper” honors in 2017 from the Certified Financial Analyst Institute.

“Manager Sentiment and Stock Returns”


Xiumin Martin, associate professor of accounting; Guofu Zhou, Frederick Bierman & James E. Spears Professor of Finance

Fuwei Jiang, Central University of Finance and Economics; Joshua Lee, University of Georgia


Journal of Financial Economics, forthcoming