When EU Leaders Speak, the Markets Listen

We use content analysis software to examine certain characteristics of communications arising from European Council meetings. These characteristics appear to explain a large proportion of variation in stock returns around the meeting dates. More specifically, stock market investors react favorably when the conclusions and declarations issued by heads of states convey a positive sentiment and demonstrate a stance of moral rectitude. On the other hand, the returns tend to be negative when the communications are obfuscated by an excessive use of abstract words and fixated on regional rather than global issues.


I. Introduction
The ambitious goal of fully understanding the forces behind the return generating process has been pursued by academics and market professionals alike since time immemorial. It soon became apparent that traditionally defined measures of fundamentals explain only a small proportion of variation in stock returns. By using an innovation accounting approach, Campbell and Ammer (1993) show that only 15% of stock return variance can be attributed to news about future dividends. A large body of research also suggests that the relationship between accounting earnings and returns is weak and unstable (for a literature review on this topic see Lev (1989)). According to Shiller (1981), the volatility of stock prices is too extreme to be rationalized within the framework of present value models. As a result, scholars have extended their search to a wider spectrum of possible determinants, including that of the sentiment of the investing public and interactions within society (Olson, 2006).
One such platform of social interaction is the political arena. Political decision-making could have the capacity to tangibly influence the environment in which issuers and investors operate and consequently affect economic outcomes.
Earlier studies examined several facets of the interplay between politics and asset valuations.
For instance, it has been shown that stock market returns are influenced by the party affiliation of the President (Santa- Clara and Valkanov, 2003), the electoral cycle (Herbst and Slinkman, 1984) and international conflicts (Berkman and Jacobsen, 2006). A more detailed account of the literature in this field is presented in the following section. Our work adopts an alternative approach to examining the relationship between the worlds of politics and finance.
More specifically, we use content analysis software to quantify the sentiment and other text characteristics of official communications arising from the meetings of the European Council.
These summits are attended by EU heads of state or government and play an important role in outlining future policy directions. Having constructed the variables that capture the tone and Electronic copy available at: https://ssrn.com/abstract=2122553 certain traits of these communications, we proceed to investigate whether they are associated with stock market performance around the meeting dates. We find the answer to be in the affirmative. This conclusion highlights the fact that political factors should not be neglected in the asset valuation process.
We show that the positive sentiment of leaders spills over into stock markets. When the proportion of positive words in the total word count of meeting documentation is high, stock prices move to reflect this. Investors do not seem to appreciate a situation in which politicians try to hide behind a smokescreen of abstract vocabulary or where they dwell on regional issues. Since the meetings of the European Council are intended to tackle global problems, devoting an inordinate amount of time to local concerns can detract attention from the main objectives. Furthermore, it appears that declarations reflecting a stance of moral rectitude are welcomed by the markets. What is interesting in the context of the summits of the European leaders considered here is that the ramifications are cross-continental and can also be detected by looking at changes in the global stock market index. Perhaps the most intriguing finding is that characteristics of political communication can explain about 20% or more of the systematic risk around the meeting dates. 3 The remainder of the paper is organized as follows. The next section reviews the prior literature and, given the multidisciplinary nature of this paper, considers contributions from several fields of science. We examine earlier findings on the interaction between politics and stock markets and also engage in a discussion on the role of political institutions in general and of the European Council in particular. This is followed by a survey of academic studies that have successfully applied the tools of computational linguistics to investigate accounting and finance problems. Section III describes the construction of political sentiment measures, 3 Since our study models returns on broadly diversified stock market indices, the variance of these returns consists of pure systematic risk. The R 2 coefficients in our regressions including political variables were in the region of 0.2, indicating that political changes account for a large fraction of the systematic risk.
the financial data and control variables used. The basic statistical properties of the variables are also elaborated upon. Section IV presents empirical analysis linking European Council proclamations with stock returns and engages in a reflection on whether the uncovered relationships are economically significant. Section V includes a battery of robustness checks.
The paper ends with some concluding remarks and reflections.

II.
Literature Review

Political Developments and Asset Pricing
Several previous studies have inquired into the nature of the relationship between stock returns and political developments. In the spirit of the partisan theory proposed by Hibbs (1977), a question has been raised as to whether the political orientation of an executive can be linked to asset valuations. The evidence presented in Santa- Clara and Valkanov (2003) attests to the fact that US stock market returns tended to be higher during Democratic than Republican presidencies and that the gap in annualized excess returns between the two was 9% for a value-weighted and 16% for an equal-weighted portfolio. These differences could not be simply explained away by the variation in investment risks under different administrations. In a related paper, Hensel and Ziemba (1995) consider profitable investment strategies in which portfolio rebalancing depends on the party affiliation of the president.
Caution however is advised when implementing such strategies, as the results obtained for the US market are not directly generalizable in the global context (Cahan et al., 2005;Bohl and Gottschalk, 2006;Bialkowski et al., 2007).
A second strand of the literature examined how the alleged opportunistic behavior of policymakers can impact on capital markets prior to national elections. Nordhaus (1975) pointed out that, in order to maximize their chances of re-election, incumbents have an incentive to manipulate policy instruments. They could be tempted to create short-lived economic expansions in order to impress the electorate and leave the implementation of unpopular antiinflationary measures for later -after the public vote has taken place. Both Herbst and Slinkman (1984) and Booth and Booth (2003) found a manifestation of these "political business cycles" in the distribution of stock returns. Bialkowski et al. (2008) also noted that since elections are often accompanied by a change in the political environment, the countryspecific component of stock market volatility tends to increase during vote-casting periods.
As a result of this heightened political risk, companies around the world reduce investment expenditures during election years (Julio and Yook, 2012).
International conflicts are another important type of political event attracting the attention of scholars. Frey and Kucher (2000) examined how the key events of World War II influenced the evolution of bond prices, while Chowdhry (2010) conducted a similar analysis for a US stock market index. Financial variables and oil prices were also shown to respond significantly to the more recent war in Iraq (Leigh et al., 2003;Rigobon and Sack, 2005).
Furthermore, in their comprehensive study, Berkman and Jacobsen (2006) et al. (1996) and argue that investors are compensated for taking on political risk.
Our study looks at the interaction between politics and markets from a somewhat different angle. More specifically, we intend to verify whether the words of national leaders speak as loudly as their actions. To this end, we analyze communiqués arising from European Council meetings, which are attended by European national leaders. Not much research has been done on the relationship between the tone of political communications and financial markets to date. We operationalize our analysis by using content analysis software that is well-suited to the task at hand.

The Broader Role of Political Institutions and the European Council
Well-functioning political institutions are essential to foster an atmosphere conducive to new investments and to create an environment in which capital markets will flourish. The results presented in Perotti and van Oijen (2001) corroborate the claim that political risk is an important barrier to stock market development, as measured by the growth in market capitalization over GNP and the growth in trading activity. The importance of political risk resolution and institutional quality is also highlighted in Yartey (2008), who argued that these factors are key driving forces behind stock market development in emerging economies. In a related piece of research, Rajan and Zingales (2003) alluded to the fact that, depending on their self-serving objectives, industry leaders and financiers may exercise their political influences to either accelerate or slow down the financial development of a country.
Political economy and institutions also appear to affect the behavior of corporate executives and financial reporting practices. Bushman and Piotroski (2006) argued that managers try to Electronic copy available at: https://ssrn.com/abstract=2122553 identify the motives of politicians and adjust the accounting numbers to counter any politically-based interference. In countries where the government tends to intervene in inefficient companies in order to improve their performance, managers will try to project an image of success by swiftly recognizing good news and delaying the reporting of bad news.
On the other hand, in countries with high expropriation risk, managers will resort to more conservative reporting to decrease the probability of forced nationalization of profitable companies. The general conclusion that arises from the aforementioned studies is that politics exerts a substantial influence on financial markets, as well as on other aspects of economic and social life.
The focal point of our inquiry is the political environment within Europe, particularly the activities undertaken by the European Council. The European Economic Union was established in 1957 with the Treaty of Rome and derives from the common cultural background that characterizes Europe (Winter, 1947 The European Council has been evolving in recent years, emerging as a very successful centre for decisions in the field of economic governance (Moravcsik, 1993) and fulfilling a crucial role as a forum for policy debate (Hodson and Maher, 2001;Puetter, 2012). This reflects increased high-level intergovernmental policy co-ordination. Since historically member state governments have resisted further transfer of formal competences to the EU, they progressively compensated for this lack of power transfer through intensified intergovernmental coordination, with the European Council playing a core role (Puetter, 2012). The intergovernmental meetings create a negotiation environment that is particularly favorable to conducting close policy dialogue among the Euro area's key decision-makers (Puetter, 2004).
Given the critical role that the European Council plays in shaping European policy, one would expect stock market investors to pay close attention to the information disclosed by this institution. As a result, the information would become impounded in stock prices.
Electronic copy available at: https://ssrn.com/abstract=2122553 Whether this is indeed an accurate portrayal of reality is the subject of our empirical inquiry that follows.

Applications of Content Analysis in Accounting and Finance Literature
In order to quantify the various characteristics of European Council communications, we use computer-assisted text analysis software General Inquirer that scans documents word-byword. The content analysis performed by the software relies on computing keyword frequencies, for keywords that fall into pre-defined tag categories. Each of the categories is based on a wordlist designed to capture a certain semantic dimension. It needs to be noted at this stage that content analysis has already been successfully applied in several earlier studies in the field of accounting and finance to examine the impact of qualitative information contained in news stories and corporate disclosures. Since we find these papers particularly instructive for our own analysis, we review them in this section.
One of the studies conducted in this subject area by Francis et al. (2002) documents that the informativeness of earnings announcement press releases increased over time, as the volume of voluntary disclosures released concurrently with earnings burgeoned. The authors show that the absolute abnormal returns were sensitive to the number of good and bad comments made by officers in those press releases. Davis et al. (2012) argue that net optimism contained in the language of earnings announcements predicts future ROA and market response around the announcement date. Demers and Vega (2010) reach similar conclusions and additionally note that more wavering language is associated with higher levels of idiosyncratic volatility. Henry (2006Henry ( , 2008 develops new tone thesauruses comprising negative and positive words used in the context of financial disclosure. By being domainspecific, rather than general, these wordlists partially circumvent the problem of polysemy (Henry and Leone, 2009). The evidence indicates that the tone measures based on Henry's corpora perform well in explaining market reaction to earnings press releases (Henry and Leone, 2009).
Instead of focusing on the properties of earnings announcements, another stream of literature concentrates on the president's letter to shareholders. By classifying and coding particular themes and words, McConnell et al. (1986) provide evidence that presidents' statements are predictive of firms' future stock market performance. Swales (1998) subsequently reexamined and confirmed this finding. Furthermore, Abrahamson and Amir (1996) argue that the relative number of words with negative connotations contained in the letters is inversely associated with accounting performance measures, while Smith and Taffler (2000) conclude that the content of a chairman's statement is useful in assessing whether a company will go bankrupt.
Analysis of textual documents can go beyond sentiment measures and examine other linguistic features. Li (2008) measures the readability of annual reports using the Gunning fog index, which is increasing in the length of sentences and the number of words with three or more syllables. He finds that firms try to obfuscate bad earnings news by increasing the linguistic complexity of annual reports. In a follow-up paper, Lehavy et al. (2011) Rogers et al. (2011) document that this is particularly true when the optimistic exaggeration of the communications coincides with insider selling.
A number of researchers have also tried to evaluate whether media sentiment has the capacity to move stock prices. By utilizing General Inquirer software, Tetlock (2007) and Tetlock et al. (2008) find that pessimistic media reportage forecasts low earnings, and influences trading volume and returns. It is however questionable whether media-based trading strategies could generate enough profit to cover transaction costs arising from the requisite high-frequency trading. Wisniewski and Lambe (2013) find evidence that downbeat media speculation exacerbated the situation in the banking sector during the credit crunch period. Lastly, Bhattacharya et al. (2009) look at stories about IPOs of Internet companies and classify them according to their tone using human judgment. They show that although the media hyped Internet stocks during the bubble-phase of the market, media behavior alone was insufficient to fully explain the formation of the bubble.
Computerized content analysis has also been used in the context of political science to assess the rhetorical styles and affect of political communications (see for instance Forsythe, 2004; Hart and Childers, 2004;Hart and Lind, 2010;Davis and Gardner, 2012;Young and Soroka, 2012). However, to the best of our knowledge, the existing literature has largely overlooked the question of how the sentiment and other characteristics of communications issued by political leaders influence stock market valuations. Our study attempts to fill this void.

III. Variable Description and Data Sources
The primary source of textual data used in this study is the online archive of the European Council. 4 This resource catalogues conclusions, statements and communications of the European Council dating back to 1993. Driven by data availability considerations, we focus on all documents that are a direct outcome of the 75 meetings held between June 1993 and January 2012. For the sake of completeness, we merge all documents produced by each of the summits into meeting-specific text files. These files are subsequently analyzed using a quantitative content analysis program called General Inquirer. This pioneering software was developed in the 1960s (Stone et al., 1966) and has since been reprogrammed and extended.
According to Pennebaker et al. (2003) it has greatly contributed to the creation of the field of computerized text analysis.
General Inquirer is capable of exploring English language texts and its word stock as well as its word categorization are based on the "Harvard-IV-4" and "Lasswell" dictionaries. By running disambiguation routines, the software infers the sense of homographs (words with many meanings) from the context in which they appear. Once the meaning has been identified, the computer program assigns each of the words into a broader category/categories. General Inquirer has been used previously in several of the papers cited in section 2.3 to assess the impact of certain media news and corporate disclosures on a range of financial variables. It has also been employed outside the field of accounting and finance, for instance, in psychology research (Harrigan et al., 1991), in analyzing international relations (Siverson, 1973) and in examining the attributes of communications contained in different catechisms (Dengler, 1974).
By design, General Inquirer computes the number of occurrences of the words from a predetermined category in the text. These numbers are subsequently scaled by the document's total word count in order to standardize the data and make it directly comparable across different European Council meetings. The four measures of language employed in our empirical inquiry are equivalent to the frequencies generated by the program. Table I  [Insert Table I about here] In general terms, political communications can be quite complex to interpret since, in their pursuit of re-election, politicians could window dress the information to improve their image (Andina-Díaz, 2009). This aspect is particularly relevant since voters are found to selectively attempt to increase their perceived similarity with their preferred political leaders by means of projection, suggesting a strong link between politicians and the electorate (Castelli et al., 2009). On the other hand, policy makers are requested to respond to the democratic needs of full disclosure. While their personal interest might sometimes overwhelm the democratic interest of clear and unbiased information disclosure, the empirical evidence suggests that democratic systems have some in-built self-correcting mechanism that safeguards the quality of the information disseminated (Gaber, 2007). As a result, the communications of politicians may provide indications of their intentions and their strategies to tackle the issues they face (Ohnuma et al., 2007).
Over and above the role of the information per se, one needs to consider what sentiment the information is likely to generate in the audience. The direct implication is that professional politicians are typically very careful in their selection of words. Because of this argument, it is important to look for clusters of words that may induce a specific effect in the audience.
We focus on positive and abstract words, as well as on words that are related to moral rectitude and to particular regions.
The first variable, Positive, represents a cluster of words that are a proxy for the general mood associated with the meeting. As per our previous argument about the role of information disclosure and the sentiment attached to words, we presume that the emotional state of the policy-makers is not immaterial, as it may affect their decisions and exhibit contagious qualities. To put it differently, the sentiment of the investment community may be influenced by political declarations. Such an explanation would be consistent with the "riskas-feelings" model propounded by Loewenstein et al. (2001) which portrays the decisionmaking process as a product of cognitive evaluations and emotional reactions. In the same spirit, Nofsinger (2005) and Shu (2010) argued that social mood is of great consequence for financial markets and that it can drive the changes in prices of common equity. One would expect high values of Positive to be associated with strong stock market performance.
The second quantitative measure of language labeled Abstract is based on terms that are not concrete and that are therefore more difficult to visualize. According to the dual coding theory propounded by Paivio (1971), abstract words are not directly associated with visual images and this makes them more difficult to process, assimilate and recognize. As a result, overusing abstract terms may not be conducive to clear communication. However, there may be deeper underlying reasons why this linguistic style is employed; reasons that may be clear to the participants of the summit, but not necessarily readily apparent to the general public.
Perhaps such a situation could be symptomatic of an impasse or deadlock in negotiations.
Taking into account the aforementioned considerations, we would anticipate a negative relationship between the frequency of abstract word use and stock market reaction.
The remaining two categories are relatively specific and contain a smaller word stock.
Rectitude primarily captures expressions of moral conviction, forgiveness or words that are characteristic of condemnation of the objectionable. Moral rectitude denotes individuals' commitment to a certain set of ethical maxims. These maxims were historically developed in Europe and Northern America during the Enlightenment of the 17th and 18th centuries, although they are rooted in Greek (Aristotle, 2009) and Christian Middle Age (Aquinas, 2009) philosophy. In fact, human beings strive to maximize their overall social benefit that also includes the economic one (Smith, 1976). In order to maximise social benefit, they also have to behave ethically and thus they commit themselves to ethical maxims (Kant, 2000).
More recently, Barney (1990) made it clear that the assumption that human decision makers are inherently prone to behaving opportunistically is problematic and highlights the importance of ethical and trusting behavior in human relationships. Moreover, the literature on social capital shows that norms of reciprocity and mutual trust are the cornerstones of a functioning economy, as they are prerequisites for collective action (Grootaert and van Bastelaer, 2002;Krishna, 2002). Finally, Granovetter (1985) criticizes the "undersocialized conception of human behavior" (p. 483) in the governance approaches of New Institutional Economics and stresses the fact that in their behavior individuals are strongly influenced by social context (Bragues, 2009).
Even if, as suggested by some research in accounting, one cannot rule out that the commitment to ethical rule can follow a strategy where the the (apparent) ethical behavior can simply depend on a strategic analysis of cost/benefits of the actors (Schrand and Walther, 2000), both theoretical (King, 1996) and empirical evidence suggests the importance of true commitment to ethical maxims (Duh et al., 2010;Schwarz, 2006) both in management and in politics. For managers, this strategy constitutes a successful entrepreneurial action (Carson et al., 2006;Eberl, 2004;Lavie, 2006), since when the leadership behavior is perceived as trustworthy through the observer's mediating lens, trust increases and leaders are more likely to be viewed as ethical stewards who honor a higher level of duties .
Thus, it is not unexpected that forgiveness and trust are critical values of today's organization leaders who are committed to maximizing the value of organizations (Caldwell and Dixon, 2010) and that the perception of being treated in an equitable way positively affects the behavior of employees (Chun-Hsi and Indartono, 2011) as well as that of lenders (Moro and Fink, 2013). In politics, Halim (2008) stresses the importance of rectitude in politicians, which is supported by electoral accountability since coherent adherence to values and principles is a key component of the evaluation made by voters and thus affects the chances of being re-elected. Moreover, judicial efficacy is a key ingredient in efficient monitoring of bureaucrats in order to reduce corruption (Halim, 2008). In fact, the beliefs of individuals regarding human nature are related in complex and sometimes contradictory ways to their political orientation (Wald and Lupfer, 1987). All in all, by drawing on the life-world concept (Schütz and Luckmann, 1973) and the categorical imperative (Kant, 2000), it becomes apparent that maxims rooted in humanity are crucial for the functioning of modern societies.
Thus, we anticipate a priori that adherence to moral values on the part of heads of states and government would be a trait appreciated by the marketplace since it implies that leaders will be more committed to implement a decision without trying to deviate from it or introduce any modifications.
Last but not least, the variable Region captures the frequency of referring to specific localities. Region is likely to record high values when politicians lobby for the interests of particular geographical areas and whenever specific local problems dominate the summit agenda. Since the European Council is essentially entrusted with shaping pan-European strategy, the focus is expected to be on problems that are global in nature. Assuming that this is the case, we expect a negative nexus between Region and stock market returns. In what follows, we argue that the four variables described in Table I are viewed as meaningful by investors.
In addition to analyzing the communiqués using computer software, we also read through these documents to carefully examine the common themes running through them. We create eight dummy variables for the most commonly discussed topics, namely competitiveness, employment, productivity, EU enlargement, justice, immigration, EU budget regulations and war & peace issues. These dummies are used in our regressions in order to disentangle the effect of the topic selection from the impact of the rhetorical style. We would however not expect a priori that the selection of themes will influence returns around the meeting dates, as the agenda items are often publicized far in advance of the summit. Even if the agenda was not preannounced, one would probably be able to anticipate the themes by analyzing the statements made by politicians or by following current affairs.
Our study also employs other control variables. More specifically, we use macroeconomic aggregates measuring industrial production growth, change in unemployment and CPI inflation recorded in a month in which a particular European Council meeting took place.
These three indicators have been selected, as they are available with monthly sampling frequency for the entire period under consideration. This empirical setup means that the controls capture the most recent macroeconomic developments, something that would have not been possible had we utilized annual data. The business cycle in Europe is proxied by Euro Zone aggregates and the aggregates for OECD are assumed to be representative of the world. The data for our control variables has been sourced from the Statistical Data

Warehouse of the European Central Bank and the OECD (Main Economic Indicators, Key
Short-Term Economic Indicators). We also control for the abnormal trading volume in stock markets within the relevant event windows, as liquidity has been shown by prior studies to be an important determinant of returns (see for instance Amihud (2002)). The exact definitions of our proxies can be found in the Appendix AI to this paper. By introducing the aforementioned controls, we are able to examine whether politicians are able to provide new information to the markets beyond a straightforward elaboration on the current macroeconomic and market conditions.
To measure the reaction of stock markets to European Council meetings we primarily employ two indices, namely MSCI Europe and MSCI World. Both of these are free float-adjusted market capitalization weighted and have been designed to measure the performance of developed markets in Europe and in the world, respectively. 5 These financial series have been sourced from Datastream. The index returns calculated in this paper are expressed using continuous compounding. We refer to the day on which the summit has ended as Day 0. In cases when the end coincided with a weekend, the first trading day after the meeting is assumed to be Day 0. Since most of the past meetings were two days in length, we start to measure the impact on stock markets from Day -1. The conclusions of the meeting are not always disclosed immediately, as they need to be translated into several languages which sometimes implies delays in the dissemination process. Also, politicians, media professionals and political pundits are likely to comment on the outcomes for several days. To take these facts into account we also examine market movements in the days immediately following the summit. With the purpose of demonstrating the robustness of our results we consider two variations of the dependent variablestotal index returns during the (-1,5) period and the (-1,10) period equivalent.
[Insert Table II  [Insert Table III about here] Table III shows a correlation matrix for our main variables. The correlation coefficients between the content variables and raw returns are signed consistently with our a priori predictions and most of them are statistically significant. We would nevertheless advise caution when evaluating the relationship between a single text characteristic and stock market returns. When perusing a communiqué, the vast majority of readers are able to assess several dimensions of a text in a single read. They subsequently form a general opinion about the communication, which is an aggregation of multiple factors. We believe that it is the generalized judgement that will drive their investment decision-making. Therefore, compared to a simple correlation analysis, a multiple regression framework would be better suited to investigate the issue in hand.
A further question that comes to mind when looking at Table III is whether the association between the content measures is strong enough to cause a multicollinearity problem in a regression framework. Whenever different explanatory variables in a regression are collinear, parameter standard errors are inflated. To verify if the correlation between regressors is indeed a cause for concern the authors used variance inflation tests. According to Chatterjee and Price (1991) Variance Inflation Factors (VIFs) in excess of 10 may be an indication of estimation problems. Since none of the VIFs in the regressions that follow exceeds a value of 2.15, we conclude that multicollinearity is not present and that all of our text-based measures can be bundled into a single regression specification.

Event Studies
Since the European Council meetings essentially constitute a series of events with clearly defined dates, the use of an event study approach is appropriate in this context. As the focus of the analysis is on indices rather than individual stocks, a constant-mean-return model for abnormal returns is more suitable than the market model equivalent (for a distinction between the two models, see Campbell, Lo and MacKinley (1997)). For each event, the mean return is Another intriguing question that could be posed at this stage is whether profitable trading strategies could be designed using textual data. At first glance, Figure I may hint at potential profits possibly exceeding transaction costs, particularly in the futures market. Reilly and Brown (2006: 833) report that in the case of stock index futures the sum of commissions and market impact typically does not exceed 15 basis points. However, it needs to be noted that there are important practical difficulties in implementing any potential strategies. While the agenda for European Council meetings may sometimes be publicized in advance, the outcome of such meetings may be difficult to predict. To realize the profits implied in this 7 One may argue that the language of the communications will be, at least to a certain extent, a function of the agenda items discussed. However, we find that in cases where the provisional/draft agenda was preannounced, the pre-announcement occurred significantly in advance of the meeting. Near-efficient capital markets would be expected to discount such information immediately. Should there be any price effect related to the selection of agenda items, it would most likely transpire prior to our (-1,5) and (-1,10) event windows.
section, one would need to correctly guess the sentiment behind future political announcements. This could be particularly difficult from the perspective of an individual investor. Political leaders may have informational advantage in this respect, but their trading activities are usually subject to greater scrutiny. indicating that political risk accounts for a substantial proportion of stock index return variance when the heads of state meet. This is testament to the fact that political dialogue at this level goes well beyond a simple exchange of platitudes and that it has a visible impact on the markets. In all of the cases, the F-statistics are statistically significant, reconfirming the importance of the observed phenomenon.

Regression Analysis
[Insert Table IV about here] All of the regression specifications show that returns are an increasing function of the Positive variable and that this effect is statistically significant. One possible rationalization of this relationship involves the mechanism of mood contagion (for a literature review on the contagious quality of emotions see Hatfield et al. (1994)). In an experimental setting, Sy et al. (2005) demonstrated that the emotional expressions of leaders are transferred onto the followers. It is possible that the affect caught by investors may be an important determinant of their financial decisions (Loewenstein et al., 2001). Leaders themselves may also not be indifferent to the emotional states they experience. Finally, we cannot completely rule out the possibility that political statements include information that has not been previously disclosed to the markets.
The results also indicate that stock markets exhibit a more favorable response when the European Council's communications contain concrete rather than abstract words. This is unsurprising considering the conclusions of earlier medical research which documented that people can recognize concrete words more quickly and remember them better (Paivio, 1971;Cox, 1978). Most likely this is because the interaction with concrete concepts involves mental imagery and engages both hemispheres of the brain. In contrast, activation induced by abstract words is restricted primarily to the left hemisphere (Paivio, 1986;Binder et al., 2005). These factors have ramifications for communicating clearly and efficiently. When political leaders resort to using overly abstract rhetoric, more skeptical market observers may suspect that there are hidden motives for adopting such a linguistic strategy.
At this stage we feel duty-bound to point out that abstractness is not necessarily synonymous with complexity. In fact, we have measured the complexity of the text documents included in our sample using the Gunning fog index, which increases in the length of sentences and words used. The correlation between Abstract and the fog index in our sample is merely 0.21, demonstrating that these two gauges indeed capture different characteristics of text. To investigate the issue further, we replaced the Abstract variable in our regressions with the fog index. The results (untabulated) show that the coefficients on the fog index are always negative, however this variable has much lower predictive power compared to Abstract.
While investors may have a slight preference for shorter words and sentences, they clearly do not initiate any major portfolio rebalancing actions based on the readability of European Electronic copy available at: https://ssrn.com/abstract=2122553 Council communications. Perhaps they have grown accustomed to the convoluted writing style inherent in political statements. Most of the documents analyzed in our study had a very high fog index, suggesting that they have been drafted for a highly literate and educated audience. The complexity of language can be viewed in this context as a tradition, rather than a bad omen. Stock market participants, however, seem to strongly object to abstract vocabulary. Abstract wording may be interpreted as purposefully vague and symptomatic of a situation where the negotiations did not yield any tangible outcomes.
Curiously, Rectitude appears to be one of the most powerful predictors of stock market Finally, the stock returns tend to be, ceteris paribus, lower whenever European Council meetings focus excessively on issues related to particular regions. Perhaps such discussions could be viewed as lobbying for specific national interests at the expense of the international community. Such conduct could potentially lead to a range of distortions and an inefficient allocation of resources. Alternatively, references to places may arise in the context of discussing specific problems that are particular to a certain geographical area. Overall, it is clear that according to investors' preferences regional issues should be dealt with on a regional level, rather than on a global forum.
Unlike the content variables, the theme dummies do not provide much explanatory power. As anticipated, all of them are statistically insignificant and their inclusion in the regressions actually decreases the adjusted R-squared. Since the agenda items are often preannounced in advance and can to a large extent be predicted, this finding is not particularly astonishing. It appears that investors pay much closer attention to what is being concluded, as opposed to what is being discussed. This is why the characteristics and language of the concluding statements are much more informative with regard to stock market valuations.
Regarding macroeconomic controls, growth in industrial production seems to stimulate increases in stock indices, which is not entirely surprising considering the findings of earlier research (see for instance Chen et al., 1986 andNasseh andStrauss, 2000). Furthermore, returns respond positively to accelerating consumer prices, as companies are in possession of real assets which appreciate nominally in an inflationary environment. The investors also seem to demand higher nominal returns to hold stocks during inflationary periods. Although unemployment represents underutilization of resources, Boyd et al. (2005) argue that bad labor market news may be actually favorable to stock markets. This is because rising unemployment diminishes the level of expected interest rates. Consequently, it is difficult to anticipate the sign of the differenced unemployment coefficient based on theoretical considerations. We find that the unemployment growth is signed negatively in most regressions, albeit this finding is statistically insignificant. Similarly, no statistical significance has been found for our abnormal trading volume proxies.
[Insert Table V about here] We repeat the regression analysis discussed above for specifications that take the cumulative abnormal return to be the relevant dependent variable. Results are shown in Table V Positive is consistently statistically significant, it is not the regressor with the greatest explanatory power. Other content variables are often superior predictors in many of the specifications. This leads us to conclude that the readership of European Council communications is rather sophisticated and able to evaluate many dimensions of the text. In future research, therefore, authors should avoid restricting their analysis to merely positive/negative sentiment and also endeavour to evaluate more subtle nuances of the statements. Additionally, the cumulative explanatory power of macroeconomic factors and abnormal volume is smaller than that attributed to our content variables. Even though political communications may be only one of a multitude of factors that codetermine the evolution of stock price movements, they appear to be an important factor nonetheless.
[Insert Table VI

V. Robustness Checks
The sentiment measures derived from a content analysis could be sensitive to the choice of dictionary used. To check the robustness of our results to alternative corpora, we consider a list of 1,045 positive words from an earlier edition of General Inquirer. This is a smaller word stock compared to the latest edition of General Inquirer, which had 1,915 words falling into this tag category. This old list defined a new variable measuring the proportion of words with positive outlook. We have also created keyword counts for our sentiment measures based on the tone thesauruses presented in Henry (2008). More specifically, for each meeting conclusion document we calculate the following indicator Positive_Tone = Positivity/(Positivity+Negativity). We take Positivity to denote the total frequency count of words catalogued on the "Positivity word list" in Henry (2008, p. 387), while Negativity records the keyword count for keywords appearing on the "Negativity word list" in the same source. The method of scaling this variable is similar to the scaling of Net Tone Scores presented in Henry and Leone (2009). Regardless of which wordlist or variable we use to capture the positive sentiment, the main conclusions arising from our regression analysis remain unaltered.
We have also constructed empirical measures to capture net tone defined as the difference between the fraction of positive and negative words in the analyzed text according to both the latest General Inquirer and Henry (2008) thesauruses. We found that net optimism, just like positivity, is a statistically significant predictor of stock market returns around the European Council's meeting dates. Furthermore, we have examined the explanatory power of negative/pessimistic words and we would like to summarize our main findings here. The various negativity variables based on Henry (2008) wordlists we constructed showed a reasonably strong negative association with returns and had statistically significant explanatory power in our regressions. This statistical significance, however, was attenuated when we switched to the General Inquirer list of words. Since Henry's wordlists have been specifically created to be suitable for accounting and finance applications, their superior performance in measuring sentiment may not be particularly surprising in our stock market study. Secondly, political leaders seem to purposefully avoid the use of negative vocabulary when referring to the meetings in which they participated. The average frequency of positive words in the sample documents is 6.2 times higher than that of the negative words according to the General Inquirer count. We therefore believe that the sentiment inherent in the text is better measured by the varying shades of optimism. As a result, it may not be an optimal strategy for investors to base their decision-making solely on negativity measures while completely disregarding information on the intensity of positive tone.
We also reflect on whether there may be any events systematically coinciding with European Council meeting dates, which could obfuscate our analysis. We first concentrate on national elections and collect election data for the 27 EU member states. 8 We only focus on those vote-casting events that determine who holds executive power. More specifically, we concentrated on parliamentary elections in countries with a parliamentary system of government and on presidential elections in nations with a presidential system. For each of the countries, we start recording elections from the date marking the beginning of our sample or the date of joining EU, whichever came later. We obtain the information on election dates from several sources, such as Lane et al. (1997), Caramani (2000), Banks et al. (2004) and the Election Guide database. Having constructed our dataset, we proceeded to check whether the dates on which voters cast their ballots coincided with meetings of the European Council.
Intuitively, this should not happen frequently, as such timetabling clashes may prevent some leaders from attending the summit. We have however discovered that the first round of parliamentary elections in the Czech Republic held on November 5 th , 2004 coincided exactly with the conclusion of the Brussels European Council. A dummy variable has been created to capture this event. We also looked at cases where the election date was not exactly equivalent to Day 0 in our event study analysis, but where the timing nevertheless fell within the (-1,10) event window. Six events were consistent with our search and another dummy variable was created for them. Inclusion of the election dummies into the regressions does not affect the predictive power of the remaining explanatory variables. We can consequently conclude that national elections should not be viewed as an important confounding factor in the context of our analysis.
One could also endeavour to examine whether other events, such as earnings seasons or September. Information about the financial performance of EU companies seems to be disclosed almost continuously, although the geographical origin of the information and its intensity may vary over time. We therefore believe that there is no reason to suspect that European Council meetings would be systematically affected by "earnings seasons".
Similarly, despite efforts to converge and harmonize, each of the EU member states has a distinct set of regulations and a parliament that alters these regulations on an almost daily basis. However, since our analysis is conducted on a European and global level, we believe that the country-specific regulatory risk will be diffused in the internationally diversified portfolios of MSCI Europe and MSCI World.
Lastly, we need to mention that the sample used in our paper is based on meeting conclusions. The European Council does occasionally issue statements that are not a direct outcome of a meeting. Going through the web page of the European Council we have identified four declarations for which disclosure dates do not overlap with the timing of meetings. These declarations are not necessarily a result of involved and prolonged multilateral negotiations and may, to a large extent, be perceived as truisms. They include obvious statements, such as reaffirmation of commitment to the euro or condemnation of terrorism. Putting the issue of informational value aside, we decided to perform a robustness check to see whether inclusion of these four observations into our sample will change the conclusions of our paper. Our regression analysis indicated that this is not the case.

VI. Conclusions
The findings presented in this paper have wide-ranging implications for the process of drafting communications of the European Council. First of all, politicians need to be aware that the sentiments contained in their messages could be contagious in nature. Their emotional state can be transferred to the general population and create events in a manner similar to a self-fulfilling prophecy. Secondly, markets favor situations in which the discussion is concrete rather than abstract and in which heads of states agree on common moral principles. Thirdly, we conclude that discussions about regional issues should be relegated to a regional level and the focus of the summits should be on topics of global importance.
When the data is looked at from the point of view of investors and asset pricing theory several interesting insights emerge. It seems that market participants scrutinize political declarations and to a large extent base their trading decisions on them. As a consequence, the political messages issued by the European Council find their way into the prices of stocks and appear to have global impact. The gap between favorable and unfavorable communications expressed in terms of cumulative abnormal returns over a 12-day event window is 3.9% for the European index and 3.4% for the World one. Moreover, a large proportion of variation in these indices around summit dates seems to be explained by the different characteristics of political announcements.
Analysis of the economic impact of joint statements revealed that the magnitude of the returns induced by the varying communication content is likely to exceed typical transaction

National Stock Market Indices and Political Communications
The table below reports estimation results for the regressions linking the returns on national stock market indices with the characteristics of European Council announcements. Returns on four main European stock market indices summed in (-1,10) event windows, computed using continuous compounding and denominated in US dollars act as dependent variables. Definitions of content variables are provided in Table I. The last column in the table aggregates the data for the four countries into one panel regression. This panel regression incorporates both country and year fixed effects, which for the sake of conserving space are not reported here. Standard errors of parameter estimates are given in parentheses. *** , ** , * denote statistical significance at 1%, 5% and 10% level, respectively.

AbVol_Europe
Abnormal trading volume averaged across four major European stock markets. More specifically, a percentage increase in volume was calculated for FTSE100, DAX30, CAC40, and IBEX35 in the event window relative to a 20 day pre-event window. An equally-weighted average across all indices was then taken. Two event windows are considered, namely (-1,5) and (-1,10).

AbVol_World
The calculation of AbVol_World is similar to that of AbVol_Europe. The only difference is that the volumes on