In this research, I explore whether announcements of CEO confidence contain new information for investors. Information asymmetry implies that insiders such as Chief Executive Officers should have better information regarding the firm prospects than the average stock market participant. Thus, announcements of CEO perceptions may provide valuable insights to investors. Utilizing The Conference Board quarterly measures of CEO confidence and CEO six-month economic outlook, I find significant correlations between changes in CEO outlook and the announcement date returns on three major stock market indexes. These correlations are larger and more significant for indexes of smaller companies, implying announcements of CEO confidence provide unique and valuable information to stock markets.CEO Confidence, Consumer Confidence, Stock Returns, Asymmetric Information

Roger Best

English

Research Papers in Economics

CEO Confidence and Stock Returns
Roger J. Best
University of Central Missouri
May 2008
Forthcoming
International Journal of Business ResearchCEO CONFIDENCE AND STOCK RETURNS
ABSTRACT
In this research, I explore whether announcements of CEO confidence contain new information for
investors.  Information asymmetry implies that insiders such as Chief Executive Officers should have
better information regarding the firm  prospects than the average stock market participant.  Thus,
announcements of CEO perceptions may provide valuable insights to investors.  Utilizing The Conference
Board  quarterly measures of CEO confidence and CEO six-month economic outlook, I find significant
correlations between changes in CEO outlook and the announcement date returns on three major stock
market indexes.  These correlations are larger and more significant for indexes of smaller companies,
implying announcements of CEO confidence provide unique and valuable information to stock markets.
Keywords: CEO Confidence, Consumer Confidence, Stock Returns, Asymmetric Information
1. INTRODUCTION
It has been commonly accepted that insiders (the managers) know more about the true value of the firm
than outsiders (shareholders) since Akerlof (1970).  To alleviate this asymmetry of information, managers
often utilize signals of firm value.  These signals include firm-specific events such as payment of
dividends, stock splits, and stock repurchases.  Beyond these firm-related activities, and with the
exception of a few high-profile executives such as Warren Buffet, Steven Jobs, and Bill Gates, it is rare to
find insight into the general perceptions of managers.  This is particularly true regarding insights that
provide a collective measure of the perceptions of many managers simultaneously.
One such measure is produced by The Conference Board via survey of high-level executives.  This
organization   easure of CEO Confidence is an average of CEO responses to three primary questions
related to current economic conditions, expectations about the economy over the coming six months, and
expectations regarding the executive  industry in the next six months.  The survey responses are
converted to a 0 to 100 scale, with readings above 50 considered  ptimistic and readings below 50
considered  essimistic   The survey is conducted and released quarterly (in January, April, July, and
October).  According to The Conference Board  website (http://www.conferenceboard.org), this measure is
considered a leading indicator of economic activity.
If this measure of CEO perceptions is, indeed, a leading indicator, market participants should react to any
new information revealed by such a measure.  It is an open question, however, whether announcements
of CEO confidence provide new and useful information to market participants.  A similar measure,
consumer confidence, is known to be significantly correlated with future consumer spending (Ludvigson
2004) and stock returns (Asgary and Gu 2005, Jansen and Nahuis 2003, Fisher and Statman 2003, and
Gulley and Sultan 1998).  However, measures of consumer confidence tend to be reported on a monthly
basis, and, therefore, have greater potential to include new (or fresh) information than the less-frequently
reported CEO confidence.  In this research, I examine the correlation between CEO confidence and
consumer confidence.  I further determine whether the release of the CEO confidence measure has an
impact on stock returns on the date of the announcement.  A direct relationship between changes in CEO
confidence and stock returns on the announcement day implies market participants perceive new
information in the confidence measure.
In general, I find that changes in overall CEO confidence are significantly correlated with both leading and
lagged changes in consumer confidence.  These correlations, however, are less than 35%, implying
unique information could be revealed through announcements of CEO confidence.  Further, changes in
overall CEO confidence are directly and significantly correlated with announcement date returns on both
the Standard and Poor  500 Index and Nasdaq index.  More importantly (given market participants focus
on future outcomes), the change in CEOs six-month economic outlook, is positively and significantly
correlated with the Dow Jones Industrial Average, Nasdaq index, and the Standard and Poor  500 index
announcement date returns.  Thus, announcements of CEO confidence and six-month outlook appear to
provide unique information to market participants, leading these participants to revise their ownexpectations.
2. LITERATURE REVIEW
To my knowledge, no previous study has examined the relationship between CEO confidence and stock
returns.  On the other hand, much has been written regarding the impact of changes in consumer
confidence on stock returns.
Gulley and Sultan (1998) examine the impact of the Conference Board  Consumer Confidence Index (CCI)
on stock prices (Dow Jones Industrial Average, S&P 500 Index, and Financial Times World Index), bond
yields, and various currency rates against the U.S. dollar (British Pound, Canadian Dollar, Deutsche Mark,
Japanese Yen, and Swiss Franc).  Using a Generalized Autoregressive Conditional Heteroskedastic
(GARCH) model, the authors find that changes in the CCI do not impact bond yields, have affect only on
the Dow for stock returns, but have much broader impacts in the rates for currency exchange.
Fisher and Statman (2003), on the other hand, use both the CCI and the University of Michigan Consumer
Sentiment Index (CSI).  In general, they find that changes in consumer confidence are positively
correlated with changes in individual investor sentiment (measured using the American Association of
Individual Investors Investor Sentiment Index), but find no relation between changes in consumer
confidence and change in an index of sentiment of institutional investors.  Further, the authors find that the
change in consumer confidence is positively correlated with contemporaneous returns of the S&P 500,
Nasdaq Index, and a small-cap index.  Interestingly, however, the authors find a negative relationship
between the level of confidence in one month and some stock returns in the next month. 
Using consumer sentiment for 11 European Union countries, Jansen and Nahuis (2003) find positive and
significant correlations between change in consumer sentiment and contemporaneous stock index returns
in 9 of 11 countries.  A Granger-causation analysis reveals that stock market returns generally cause
changes in consumer confidence, but the reverse is not true.  Otoo (1999) similarly finds that stock market
returns generally lead changes in consumer confidence for U.S. stocks.  However, while Asgary and Gu
(2005) find significant, positive correlations between change in consumer confidence and
contemporaneous stock returns in the U.S., U.K., France and Germany, they are unable to find a causal
relationship in these changes.  These studies are limited, however, by their use of monthly
(contemporaneous) returns, which may be influenced by factors other than consumer confidence.
3. EMPIRICAL METHODOLOGY AND RESULTS
To determine whether announcements of CEO confidence contain information to market participants, I
utilize CEO confidence data provided by the Conference Board from January 2000 to April 2008.  This
generates 34 observations for (quarterly) change in CEO confidence.  I then employ several tests.  First, I
examine the correlation between changes in CEO confidence and consumer confidence.  CEO confidence
announcements are  aluable only if they contain new or unique information.  It is possible that quarterly
CEO confidence announcements provide the same information to the market as the more frequently
published consumer confidence measures.  That is, a high degree of correlation between changes in CEO
and consumer confidence measures implies redundancy of information. 
Because CEO confidence is issued quarterly, I compute the quarterly change in consumer confidence so
that the two measures are taken over the same time period.  CEO confidence announcements tend to
occur in the first half of the month of issue, while consumer confidence (from the Conference Board) is
announced at the end of each month (the announcements, when they occur in the same month, are
usually about two weeks apart).  Thus, I calculate the quarterly change in consumer confidence in two
ways.  First, I calculate the change using consumer confidence announced in the same month as CEO
confidence.  Because CEO confidence is announced before consumer confidence in the particular month,
the CEO confidence measure can be viewed as leading consumer confidence.  A high correlation between
these measures suggests duplication of information, but implies that CEO confidence is the more relevant
announcement.  Second, I calculate the change in consumer confidence using the month prior to the
release of the CEO confidence measure to determine whether consumer confidence might lead CEOconfidence.  I then calculate the correlations between changes in CEO confidence and each of these
(quarterly) changes in consumer confidence.  These results appear in Table 1.
TABLE 1
CORRELATION BETWEEN CONSUMER CONFIDENCE AND CHANGE IN CEO CONFIDENCE
Change in Consumer Confidence Measured in
Correlation
(p-value)
Month of CEO Confidence Announcement  0.2978
(0.0436)
Month Before CEO Confidence Announcement  0.3596
(0.0184)
As shown, change in CEO confidence is significantly correlated with both leading and lagged change in
consumer confidence (probability values of 0.0436 and 0.0184 respectively).  Further, lagged change in
consumer confidence has a higher correlation than leading (0.3596 versus 0.2978), implying change in
CEO confidence captures relatively more information from (already known) consumer confidence than
vice-versa.  However, the magnitudes of the correlations indicate that CEO confidence contains unique
information.
To determine whether this unique information is valuable to market participants, I next examine the returns
on the Standard and Poor  500 index (SP500), the Dow Jones Industrial Average (DJIA), and the Nasdaq
index on the date CEO confidence is announced and compare these returns to the returns on all other
days.  I determine announcement dates by searching the Lexis-Nexis news wire database. The advantage
of using announcement day returns is that there are far fewer events to which market movements might
be attributed than for the monthly returns used in other studies.  The average returns are in Table 2.
TABLE 2
AVERAGE ANNOUNCEMENT RETURNS VS. ALL OTHER DAYS, JAN. 1, 2000 - APRIL 30, 2008
Index Average Returns in Percent
SP500 DJIA Nasdaq
Panel A.  Overall CEO Confidence
CEO Confidence Increases (n = 15) 0.28 0.20 0.84
No announcement (n = 2,059) 0.00 0.01 -0.01
CEO Confidence Declines (n = 19) -0.29 -0.21 -0.07
Panel B. CEO 6-month Outlook
Outlook Improves  (n = 13) 0.34 0.26 1.00
No announcement (n = 2,060) 0.00 0.01 -0.01
Outlook Worsens (n = 20) -0.31 -0.26 -0.14
Panel A of Table 2 includes the average announcement returns for the main measure of CEO confidence.
This measure is provided by The Conference Board and is calculated as an average of the responses to
several questions in the CEO survey.  Over the sample period (January 1, 2000 - April 30, 2008), there
are 15 instances in which CEO confidence increases from the previous quarter and 19 instances of a
decline in CEO confidence.  This leaves 2,059  on-announcement days in the sample.  The pattern of
returns for all indexes is consistent with the release of new information.  For the non-announcement days,
the average return over this sample period is approximately zero for each index.  However, for increasesin CEO confidence, the average returns are 0.28%, 0.20%, and 0.84% for the SP500, DJIA, and Nasdaq
respectively.  For declines in CEO confidence, the average returns are -0.29%, -0.21%, and -0.07% for
these three indexes.  The pattern of returns associated with the  -month outlook is even more striking.
In The Conference Board survey, CEOs are asked for their perceptions about economic conditions over
the next six months.  These results are reported on a 0-100 scale along with the  verall confidence
measure.  Because stock prices are set based on expectations of future outcomes (not current
conditions), it is likely that this measure is more important to market participants.  As shown in Panel B of
Table 2, there are 13 quarters in which the CEOs outlook increased and 20 instances in which outlook
declined (in one quarter, CEO outlook did not change).  For the 2,060  on-announcement days, the
average return for each index is approximately zero.  For the 13 instances in which CEO outlook
improves, the average return is 0.34%, 0.26%, and 1.00% for the SP500, DJIA and Nasdaq respectively.
The 20 observations for which CEO outlook worsens have an average return of -0.31%, -0.26%, and -
0.14% for the SP500, DJIA and Nasdaq, respectively.
The small sample sizes for each announcement category in Table 2 prevent use of standard parametric
test statistics to determine whether the average returns differ significantly from zero.  To utilize all
observations, I instead calculate the correlation between the change in CEO confidence and CEO six-
month outlook and the returns for each of these indexes on the announcement dates.  These correlations
are in Table 3.
TABLE 3
CORRELATION BETWEEN ANNOUNCEMENT RETURNS AND CHANGE IN CEO CONFIDENCE
Index
SP500 DJIA Nasdaq
Overall Confidence
(p-value of correlation)
0.2791
(0.0550)
0.1994
(0.1291)
0.3488
(0.0216)
Six-Month Outlook
(p-value of correlation)
0.3250
(0.0303)
0.2438
(0.0823)
0.4194
(0.0068)
As shown, the change in overall CEO confidence is positively and significantly correlated with the
announcement date return for the SP500 (correlation of 0.2791, p-value of 0.0550) and the return on the
Nasdaq (correlation of 0.3488, p-value of 0.0216).  The change in overall CEO confidence is not
significantly correlated with announcement returns on the DJIA.  The CEO six-month outlook measure
shows significant correlation with the returns on all indexes.  The change in six month outlook has a
correlation of 0.3250 (p-value of 0.0303) with the SP500 announcement date returns, 0.2438 (p-value of
0.0823) with the DJIA announcement date returns, and 0.4194 (p-value of 0.0068) with the Nasdaq.
Collectively, these results imply a significant release of information to stock market participants.  In general
stock prices adjust in an expected manner when CEO perceptions are revealed hat is, when CEOs believe
the coming six-months will be better economically, stock prices increase on the date of the announcement,
and when CEOs believe the coming six-months will be worse economically, stock prices decline.
Table 3 further highlights the importance of the information contained in CEO confidence and outlook
announcements.  In general, the correlations for the largest stocks, as represented by the DJIA (an index
of 30 blue-chip companies) are lower than for other stocks.  Further, the correlations for the SP500 stocks
are higher than those for the DJIA, but smaller than those for the Nasdaq.  Thus, announcements of CEO
confidence and six-month outlook appear to reduce information asymmetry for investors, particularly for
smaller companies (those generally believed to have the highest levels of information asymmetry).
4. CONCLUSIONS
I explore whether stock returns are impacted by changes in CEO confidence regarding current economic
conditions as well as conditions expected over the next six months.  Information asymmetry implies thatCEOs collectively should have better information regarding the firm  future prospects.  Thus, a change in
the collective perception of CEOs could provide meaningful information to stock market participants once
those perceptions are revealed via news announcements.
Using The Conference Board  measure of overall CEO confidence and CEO outlook for the economy in
the coming six-months, I find that increases in CEO confidence and outlook are accompanied by average
increases in the Standard and Poor  500, Dow Jones Industrial Average, and Nasdaq indexes.  Further,
declines in CEO confidence and outlook are associated with negative average returns on these indexes.
For days on which CEO confidence is not announced, the average return on these indexes is
approximately zero.  Additional analysis reveals that changes in confidence and outlook are both
significantly, positively correlated with index returns.  These correlations are larger (and more statistically
significant) for the Nasdaq index. 
Indeed, there is a monotonic increase in the size and statistical significance of the correlation between
change in CEO confidence (and outlook) for the DJIA, SP500 and Nasdaq (indexes which include very
large, large, and somewhat smaller companies, respectively).  This implies that the information contained
in CEO confidence announcements is more valuable for those firms typically considered as having the
highest level of information asymmetry.
5. REFERENCES
Akerlof, George,  he Market for  emons  Qualitative Uncertainty and the Market Mechanism, Quarterly
Journal of Economics, Vol. 85 (3), 1970, 488-500.
Asgary, Nader and Anthony Yanxiang Gu,  he Stock Market and Consumer Confidence: An International
Comparison, Journal of Accounting and Finance Research, Vol. 13 (3), 2005, 205-213.
Fisher, Kenneth L. and Meir Statman,  onsumer Confidence and Stock Returns, The Journal of Portfolio
Management, Vol. 30 (1), 2003, 115-127.
Gulley, O. David and Jahangir Sultan,  onsumer confidence announcements: do they matter? Applied
Financial Economics, Vol. 8 (2), 1998, 155-166.
Jansen, W. Jos and Nick J. Nahuis,  he stock market and consumer confidence: European evidence,
Economic Letters, Vol. 79 (1), 2003, 89-98.
Ludvigson, Sydney C.,  onsumer Confidence and Consumer Spending, Journal of Economic Perspectives,
Vol. 18 (2), 2004, 29-50.
Otoo, Maria Ward,  onsumer Sentiment and the Stock Market  The Federal Reserve Board, Finance and
Economics Discussion Series, 1999, http://www.federalreserve.gov/.

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he stock market and consumer confidence:

he Stock Market and Consumer Confidence: An International Comparison,

onsumer Confidence and Consumer Spending,

onsumer Confidence and Stock Returns,

onsumer confidence announcements: do they matter?

onsumer Sentiment and the Stock Market The Federal Reserve Board, Finance and Economics Discussion Series,

CEO Confidence and Stock Returns

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