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Hot Stocks and Cold Comfort: A Comparative Study of Optimism in Financial News and Household Participation in Equity Markets in the U.S., France, and Hong Kong, 1985-2008 Sophie Guité Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy under the Executive Committee of the Graduate School of Arts and Sciences COLUMBIA UNIVERSITY 2011 © 2011 Sophie Guité All rights Reserved ABSTRACT Hot Stocks and Cold Comfort: A Comparative Study of Optimism in Financial News, and Household Participation in Equity Markets in the U.S., France, and Hong Kong, 1985-2008 Sophie Guité I use computer-assisted textual content analysis to detect systematic reporting bias in financial news articles from 1985-2008 in the U.S., France, and Hong Kong in order to discern whether such biases contribute to country-level differences in household participation in equity markets. Today about 50% of American households hold stock (or equity) directly or indirectly in publicly traded corporations, while only 24% of French households and 36% Hong Kong adults do so. Publications analyzed include: in the U.S. the Wall Street Journal and the business section of The New Y ork Times; in France Le Monde, Le Figaro, and Les Echos; and in Hong Kong the Standard and the South China Morning Post. The content analysis revealed consistent, country-level differences in how newspapers report financial news. These differences corresponded not with the overall level, but with the rate of growth in household equity market participation from one country to the next. In Hong Kong, where household equity market participation grew 171% from 1992-2004,1 financial news sources followed consistent patterns that, taken 1 From 9% to 24%; Research & Corporate Development, "Retail Investor Survey," Hong Kong Exchanges and Clearing, Ltd. http://www.hkex.com.hk/research/reinvsur/RIS2007.pdf (accessed 5/1/09). together, could be described as pro-business. In contrast in France, where ownership grew by just 2.5% over the same time period,2 news sources were the least pro-business. In the U.S., where ownership grew 37% from 1992-2004,3 news sources fell somewhere in the middle in terms of pro-business language. By “pro-business, “ I mean that Hong Kong newspapers used the most positive, the fewest negative, the most investment-related, and the fewest scandal words, while French publications used the fewest positive, the most negative, the fewest investment-related, and the most scandal-oriented words. While word use fluctuated with time, and with equity markets, country-level differences withstood these changes. Country-level differences also withstood left-right bias within countries. In other words, a left-leaning French publication looked much more like a right-leaning French publication than it looked like a left-leaning U.S. publication. Positive story bias does not, on its own, fully explain the extremely high level of American household stock ownership, but may help to explain the faster growth in stock ownership among Hong Kong citizens compared with those in the U.S., and the relatively slower growth of equity ownership in France from 1992-2004.4 2 From 23.6% to 24.2%; F. Dumontier, F. Guillaumat-Taillet and J.-J. Malpot, "Le Patrimoine des ménages se diversifie," INSEE Premiere No. 454, May 1996, Paris: INSEE, 1996; Marie Cordier and Catherine Rougherie, "Patrimoine des Ménames début 2004: Le déploiement de l'épargne salariale," INSEE Premiere No. 985, Septembre 2004, Paris: INSEE, 2004. 3 From 37% to 50%; The Federal Reserve Board, "2007 Survey of Consumer Finances Chartbook," March 9, 2008, Board of Governors of the Federal Reserve System http://www.federalreserve.gov/PUBS/oss/oss2/2007/scf2007home.html (accessed 4/26/09). 4 1992-2004 is the longest range for which comparative data is available on household stock ownership. In particular, data on French households is only available from 1992-2004. Similar growth trends are evident from 1989-2007 in Hong Kong and the US. During this time stock ownership grew by 61% in the US and by almost 300% in Hong Kong. TABLE OF CONTENTS ACKNOWLEDGEMENTS ............................................................................... iv PART 1. INTRODUCTION Chapter 1. Introduction ....................................................................................... 1 Chapter 2. Patterns of Household Investment .................................................. 17 PART 2. LITERATURE Chapter 3. Literature Review ............................................................................ 46 PART 3. TESTING FOR BIAS IN THE FINANCIAL NEWS MEDIA Chapter 4. Data and Methodologies .................................................................. 88 Chapter 5. Results ............................................................................................ 126 Chapter 6. Conclusion ..................................................................................... 184 BIBLIOGRAPHY ........................................................................................... 200 APPENDIX ..................................................................................................... 209 i LIST OF FIGURES Number Page Figure 1: Percent of U.S. households that own stock directly and indirectly. ...................... 21 Figure 2: Percent of U.S. households owning stock directly and directly/indirectly in 2007 by occupation, income percentile, and race. .............................................................. 23 Figure 3: Ownership of stocks and bonds among U.S. households in 2008 by income and retirement plan availability. ....................................................................................... 25 Figure 4: Asset allocation among owners of IRAs and 401(k)-type accounts by household income, 2004. ............................................................................................................. 29 Figure 5: Percent of French households owning stock directly and combined directly/indirectly 1992-2004. ................................................................................... 32 Figure 6: Percent Share Contributed by Financial Services Industry to Hong Kong and US GDP ............................................................................................................................ 36 Figure 7: Annual percentage of Hong Kong adults owning or trading stock in prior 12 months ........................................................................................................................ 38 Figure 8: 2007: Stock trading is prevalent across most occupational groups in Hong Kong39 Figure 9: Percent each fund type makes up of total MPF net asset value (NAV) ................ 43 Figure 10: Percent of each fund type that is invested in equities .......................................... 43 Figure 11: Mean level of optimism for each country ............................................................ 64 Figure 12: Percentage of U.S. households owning stock directly and indirectly compared with the percentage of households owning stock in employer-sponsored retirement accounts: 1989-2007. ................................................................................................. 74 Figure 13: Percentage of Hong Kong adults that own stock compared with the percentage of employed population enrolled in an MPF scheme: 1989-2007. ........................... 75 Figure 14: % U.S. Income Tax for the Highest Tax Bracket 1956-2006 .............................. 81 Figure 15: S&P 500 Index 1950-March 2009 .................................................................... 111 Figure 16: France CAC 40 Index 1990-March 2009 .......................................................... 114 Figure 17: Hong Kong Hang Seng Index 1986-March 2009 ............................................. 120 Figure 18: Influence of outliers: Monthly proportion of negative words in Le Monde business section vs. CAC 40 Index with outliers. .................................................. 122 Figure 19: Influence of outliers 2: Monthly proportion of negative words in Le Monde business section vs. CAC 40 Index without outliers. ............................................. 124 Figure 20: Unweighted proportion each category contributes to total words by publication, 1993-2008 ............................................................................................................... 130 Figure 21: Positive and negative words as a proportion of total words: a comparison of the Wall Street Journal, Le Monde, and the South China Morning Post. .................... 131 Figure 22: Weighted proportion each category contributes to total words by publication, 1993-2008 ............................................................................................................... 137 Figure 23: Monthly gain of $1 invested in each index from 1993-2008. ........................... 144 Figure 24: Regression results for the U.S. .......................................................................... 150 Figure 25: Regression results for Hong Kong, 1994-2007 ................................................. 152 ii Figure 26: U.S. Correlation Matrix – Monthly S&P 500 Index returns vs. proportion of all words in the WSJ sample from each content analysis category. ........................... 159 Figure 27: Proportion of words falling in Positive and Negative categories in Wall Street Journal, 1985-2008. ................................................................................................ 160