The Counter-deception Blog
Examples of deceptions and descriptions of techniques to detect them. This Blog encourages the awareness of deception in daily life and discussion of practical means to spot probable deceptions. Send your examples of deception and counter-deception to colonel_stech@yahoo.com.Sunday, April 03, 2005
You Can Fool Some People Sometimes
Authors: Rasa Karapandza, Milos Bozovic
We develop an empirical procedure to quantify future company performance based on top management promises. We find that the number of future tense sentence occurrences in 10-K reports is significantly negatively correlated with the return as well as with the excess return on the company stock price. We extrapolate the same methodology to US presidential campaigns since 1960 and come to some startling conclusions.
Annual reports, including 10-K reports in the United States, have two major functions: a) to inform current and potential investors, as well as the regulators, about significant developments that shaped previous year's company results and b) to help investors forecast company results for the next period. In such a situation it is conceivable that the top management of companies may use these reports to make excessive promises in an attempt to convince the investors that the situation is rosy even when it is not. To get an idea about a potential relation between such promises and the subsequent company performance we looked at 555 10-K reports of the American S&P 100 companies during the period from 1993 to 2003. We found a whopping 313,852 times that future tense constructions were used in the reports (we define these as sentences that contain either will, shall, or going to). Importantly, companies who used less future tense sentences in their reports achieved significantly higher returns and excess returns in the subsequent fiscal year.
A similar pattern of behavior can be observed among politicians and can give us a simple way of predicting the outcome of the American presidential elections! Namely, in all presidential debates in the period 1960-2000 for which the transcripts from the debates were available (in 1984 two debate transcripts were not available, while the debates were not conducted in 1964, 1968 and 1972), a presidential candidate who made less use of future tense sentences won the popular vote whether he was an incumbent or a challenger. According to this simple rule of thumb, this year's winner of the popular vote should be President George W. Bush.
Paper available at http://arxiv.org/pdf/math.ST/0410586
We develop an empirical procedure to quantify future company performance based on top management promises. We find that the number of future tense sentence occurrences in 10-K reports is significantly negatively correlated with the return as well as with the excess return on the company stock price. We extrapolate the same methodology to US presidential campaigns since 1960 and come to some startling conclusions.
Annual reports, including 10-K reports in the United States, have two major functions: a) to inform current and potential investors, as well as the regulators, about significant developments that shaped previous year's company results and b) to help investors forecast company results for the next period. In such a situation it is conceivable that the top management of companies may use these reports to make excessive promises in an attempt to convince the investors that the situation is rosy even when it is not. To get an idea about a potential relation between such promises and the subsequent company performance we looked at 555 10-K reports of the American S&P 100 companies during the period from 1993 to 2003. We found a whopping 313,852 times that future tense constructions were used in the reports (we define these as sentences that contain either will, shall, or going to). Importantly, companies who used less future tense sentences in their reports achieved significantly higher returns and excess returns in the subsequent fiscal year.
A similar pattern of behavior can be observed among politicians and can give us a simple way of predicting the outcome of the American presidential elections! Namely, in all presidential debates in the period 1960-2000 for which the transcripts from the debates were available (in 1984 two debate transcripts were not available, while the debates were not conducted in 1964, 1968 and 1972), a presidential candidate who made less use of future tense sentences won the popular vote whether he was an incumbent or a challenger. According to this simple rule of thumb, this year's winner of the popular vote should be President George W. Bush.
Paper available at http://arxiv.org/pdf/math.ST/0410586
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