Companies invest in optimism, study finds
If you think your governor’s annual “State of the State” address is nothing much more that a lot of political hot air, you may be right. But someone is listening, and it apparently has an effect on the investment in your state’s economy.
A new study authored by professors at three state universities found there is a correlation between the governor’s optimism and subsequent business investment in that state. Larry Fauver of the University of Tennessee, Art Durnev of the University of Iowa, and Nandini Gupta of Indiana University took a look at almost 10 years worth of speeches from 2002 through 2010. They referenced the speeches against more than 5,700 companies based on the company’s headquarter’s locations.
“In the year following the speech, businesses in states where the governor gave a more optimistic speech invested 2% more of their capital compared to firms in states where the governor gave a more pessimistic speech,” according to a report on the study from the University of Tennessee. “Similarly, firms in states where the governor gave a more pessimistic speech employed 0.4% fewer workers than those in states that heard a more optimistic speech, according to the study.”
Fauver first presented the research Jan. 5 at the American Economic Association meeting in Philadelphia. The study’s results were featured in the fall edition of Insight, a publication of the Indian School of Business in India.
Among the study’s findings:
- Firms that obtain state government contracts significantly increased investments if the budget-related parts of the speech were more optimistic.
- Companies that are more dependent on skilled employees significantly increased their investment spending if the education-related parts of the speech were more optimistic.
- When economic times were tougher and information less available, firms paid more attention to the speeches. This suggests that the political speeches are informative and contain information that is relevant to firms and investors.
After looking at 388 State of the State speeches, researchers concluded the addresses did clarify a state’s outlook for such things as taxes, infrastructure improvements and education.
“Conversely, political speech may be uninformative rhetoric reflecting a political agenda or may simply reproduce information already known to investors and firms,” the study states.
For a copy of the study, email firstname.lastname@example.org.
– Edited by Jessica DuBois-Maahs, Associate Content Manager, CFE Media, Plant Engineering, Control Engineering