Twenty million—that’s how many people read the Wall Street Journal every month and potentially how many sets of eyes saw a recent article highlighting the research of finance professor Jim Brau. What’s more impressive: this isn’t the first time.
“Over the years I’ve been in various news outlets, including the Wall Street Journal,” Brau says. “It’s great because it brings attention to the top-notch research we’re doing at BYU. We know our students are amazing, but we’re also doing a lot of research. That’s something our students and alumni might not follow as much.”
Working with BYU strategy professor David Benson, James Cicon of the University of Central Missouri, and Stephen Ferris of the University of Missouri, Brau used computer software to analyze the text within companies’ initial public offerings (IPO). The software looked at word usage and the placement of those words within the document. “The idea was if companies have bad news there is an incentive to camouflage it by sticking it somewhere less noticeable or wording it in a way that’s harder to understand,” Brau explains. “If companies have good news then they want it to be worded very clearly. And they’ll put it right up front in the text of the IPO.”
The study showed that companies don’t use the camouflage method when there are several analysts looking at the IPO because they don’t want to get caught. However, the technique is used more often when a higher number of IPOs are hitting the market and each company is subject to less scrutiny. So what does this mean for the market and investors?
“It is reflected in stock prices,” Brau says. “When companies are less transparent it’s almost as if they’re able to fool a certain segment of investors. Our work is helping facilitate more transparency in the marketplace.”
The research has garnered attention beyond the Wall Street Journal. Brau received an email from a top IPO expert, congratulating him on the article and commending the team’s work.
So what’s next for Brau (outside of teaching 1,500 students this semester)? A new research project using facial recognition software to track the emotions of CEOs when making announcements coupled with textual analysis to see how and if their remarks affect stock prices.