PROMISING FAILURE: Political and Company Rhetoric as a Determinant of Success

Abstract

I show that firms that make sparing use of the future tense in their annual reports significantly outperform those that use it more. Similarly, in all of the U.S. presidential elections from 1960 through 2004, the candidate who made less use of the future tense during the televised debates won the popular vote. I show that the frequency of using future-tense sentences is strongly correlated with the frequency of making promises and that the latter can be modeled within a game-theoretic framework.

What’s a promise worth? At the start of Shakespeare’s Love’s Labour’s Lost, four men swear to forgo all worldly pleasures and, in particular, sex. A group of French ladies quickly helps them to reconsider. One by one, the men break their promises. The tension between their oaths and the temptations offered by a group of attractive young women is responsible for much of the entertainment, and it allows us to gain insight into each man’s character. That solemn oaths are not good predictors of future behavior has been noted throughout the ages by writers and philosophers alike. Jean-Jacques Rousseau argued that those who make promises keep few of them: “He who is slowest in making a promise is most faithful in keeping it.”

In this paper, I ask if Shakespeare’s and Rousseau’s instincts are true and whether we should trust those who make commitments for the future. In particular, I examine if the extensive use of promises about one’s future actions predicts poor performance and/or failure. I explore this issue in two distinct areas: corporate financial success and the popular vote in U.S. presidential elections. By studying the language structure used in corporate reports, I show that the frequency of the verbs “will”, “shall”, and “going to” represents a good proxy for a frequency of promises in these reports. Therefore, I will interchangeably use the terms future tense and promises. It turns out that companies that use future tense less frequently in their reports systematically outperform companies that use future tense more often. This relationship is not restricted to financial markets; a similar pattern exists in the context of political rhetoric. The U.S. presidential candidates who consistently make more statements about the future tend to lose the subsequent popular vote. Both of these findings are consistent with theoretical predictions on the existence of equilibrium with inflated talk in the model of Kartik, Ottaviani, and Squintani (2007) (hereafter KOS), which is built on a classic “cheap talk” game (Crawford and Sobel 1982). To the best of my knowledge, this is the first study connecting game-theoretic models of talk with a feature of real everyday language.

The finance literature has recognized that quantitative data in corporate reports may be important for pricing (Fama and French 1993; Chan, Jegadeesh, and Lakonishok 1996; Sloan 1996; Franzoni and Marin 2006). The impact of language use on performance and price formation in financial markets has been studied previously. Tetlock, Saar-Tsechansky, and Macskassy (2007) showed that a fraction of negative words in company-specific news stories forecasts low earnings. Moreover, company earnings briefly under react to the information embedded in negative words. Similarly, Tetlock (2007) studied how the proportion of negative words in popular news columns on the stock market is incorporated into aggregate market valuation. The work of Antweiler and Frank (2004) is similar in spirit. The authors constructed an algorithm to assign a “bullish”, “neutral”, or “bearish” rating to more then 1.5 million messages posted at the Yahoo! Finance website about various companies and found that these messages not only help predict market volatility but also have a statistically significant effect on stock returns. These studies analyze the wording of messages about companies, or about stocks in general.

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