Whitepaper

Evidence-based communication

to drive corporate value

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Outline

Abstract ....................................................................................................... 2

Corporate communication is looking for fact-based communication .................. 3

Tonality – the key for evidence-based communication ...................................... 4

How Big Data Analytics obtain Tonality scores from financial news .................... 4

How to steer Tonality in corporate communications .......................................... 6

The value proposition of Tonality .................................................................... 7

Conclusion ................................................................................................... 8

Contact information ...................................................................................... 9

Abstract

To ensure sustainably strong stock market performance, companies do not only

require a competitive business model, but also an effective communication

strategy. Corporate communication is all about communicating relevant facts that

can have a direct impact on corporate value. In order to communicate in a fact-

based manner, corporate communication professionals increasingly look for

objective, science-based communication support systems. New innovative

companies support corporate communication practitioners by identifying which

words investors perceive positively or negatively. Using a unique database of

corporate press releases and related abnormal stock market movements, they

extract the impact of individual words on stock market performance. One of the

leading providers in this field is the company TonalityTech. Founded as a spin-off

from the University of Freiburg, the company has developed an Add-In for

Microsoft Word, which highlights words depending on their perception by

investors and provides suggestions for better, alternative options. In addition, the

tool facilitates the stringent implementation of high readability.

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Corporate communication is looking for fact-based

communication

Investors, such as investment funds, banks, family offices and private financiers,

require information on all developments relevant to the valuation (price) of a

stock-listed company. Consequently, Investor Relations and Media departments

need to communicate the strengths and opportunities their company holds to the

public – without drawing an incorrect picture of the real economic situation of the

business. Corporate communications are, however, not only about communicating

facts. As academic research has proven, it is the tone of language that has a

significant impact on how investors perceive a corporate disclosure. Investor

Relations practitioners, nonetheless, face a lack of evidence on how investors

perceive their language. Following more than 50 interviews with corporate

communication decision-makers, the company TonalityTech identified three

central unmet needs of corporate communications practitioners, as summarized in

Figure 1.

Figure 1: Unmet needs of corporate communication practitioners

The rigorous and diligent processes of preparing press releases for stock-listed

companies reflect the great importance of corporate communication in driving

corporate value. For investors, the news flow of a company is naturally the most

important information source. Thus the way in which companies compose their

investor updates – in line with existing regulations – acts as an important driver of

share price movements.

The vision of TonalityTech is to enable evidence-based communication.

TonalityTech strives to achieve this vision through the rigorous analysis of a

comprehensive database of corporate disclosures. TonalityTech combines Big Data

analytics with expertise in capital market communication in an easy-to-use Add-

In for Microsoft Word. The Add-In facilitates creating corporate and capital market

communication based on scientific and objective facts – seamlessly integrated into

existing processes.

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Tonality – the key for evidence-based communication

Investors form their investment and trading decisions based on new capital market

information. New information leads to asset price adjustments that depend on the

facts contained in new announcements. However, the language used in corporate

communication also strongly affects investor reactions. Investors identify key

words in news announcements and base their trading decisions, sometimes

unconsciously, on the signal of the language tone. Tonality, also often referred to

as sentiment, thus reflects the reaction of investors to the language used in

corporate communications.1

How Big Data Analytics obtain Tonality scores from financial

news

TonalityTech empirically analyzes stock price reactions to capital market

disclosures based on a dataset of more than 100,000 corporate disclosures.

TonalityTech applies state-of-the art techniques from Machine Learning and

Bayesian Statistics to generate Dynamic Tonality Dictionaries (DTD). To generate

the dictionaries (DTD), TonalityTech identifies in a first step those words that have

a relevant and causal effect on investor buy-or-sell decisions. In a second step,

TonalityTech assigns a relative Tonality score, ranging from -1 (very negative) to +1

(very positive), to each relevant word2. The dictionary (DTD) then summarizes

these words, including their Tonality scores. The metric of Tonality hence

anticipates the reaction of investors to the language used in news. Academic

research shows that Tonality is a strong predictor of stock price movements

following news announcements.3 Calculating the Tonality score follows the process

depicted in Figure 2:

1. TonalityTech converts news announcements relevant to an industry or

within a geographical area into a machine-readable representational format

from their comprehensive text base of more than 100,000 corporate

disclosures published within the last three years

2. TonalityTech identifies the decisive words that are relevant stock price

movers based on the applied Machine Learning and Bayesian algorithms

1 Algorithmic trading accounts for the majority of trading. Increasingly, algorithmic trading implements trading strategies that take tonality

into consideration. Such algorithmic trading strategies trade partly (or fully) on the tone of news instead of the factual content.

2 This distinguishes Tonality.Tech’s approach from social media sentiment analysis, in which static psychosocial dictionaries determine the

sentiment scores.

3 Antweiler, W. and M. Z. Frank (2004). “Is All That Talk Just Noise? The Information Content of

Internet Stock Message Boards.” Journal of Finance 59 (3), 1259–1294.

Tetlock, P. C. (2007). “Giving Content to Investor Sentiment: The Role of Media in the Stock Market.” Journal of Finance 62 (3), 1139–1168.

Tetlock, P. C., M. Saar-Tsechansky, and S. Macskassy (2008). “More Than Words: Quantifying Language to Measure Firms’ Fundamentals.”

Journal of Finance 63 (3), 1437–1467.

Liebmann, M., M. Hagenau, and D. Neumann (2012). “Information Processing in Electronic Markets: Measuring Subjective Interpretation

Using Sentiment Analysis.” In: Proceedings of the International Conference on Information Systems (ICIS 2013). Association for Information

Systems.

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3. TonalityTech assigns positive or negative scores to words which are relevant

stock price movers

Figure 2: TonalityTechs’s backend: from corporate disclosures to Dynamic Tonality Dictionaries (DTDs)

The benefits of TonalityTech’s dictionaries (DTD) in comparison to other

dictionary-generation approaches are manifold:

• Domain-specific calibration of the procedure: depending on the target

group of the communication, TonalityTech can tailor dictionaries (DTD) to a

specific geographical area or industry. This approach provides a more

precise calibration of the dictionaries (DTD) as opposed to standard

sentiment analysis using static dictionaries.

• Continuous scoring: TonalityTech provides Tonality scores that are

continuous, lying within a range of +1 and -1. This gives a more detailed view

of the textual announcements. State-of-the art sentiment analyses usually

use standard dictionaries (e.g. Harvard IV) that only offer binary categories

of positive and negative words. The dictionaries (DTD) powered by

TonalityTech offer a very fine-grained scale that reveal how positive and

negative words are perceived by investors.

• Frequent updates: Investors’ language perception varies substantially over

time. Hence, it is fundamental to continuously repeat the analysis in order

to capture changes in language processing.

• Context representation: The applied Machine Learning and Bayesian

algorithms are well suited to capturing the context of textual paragraphs.

While typical approaches represent texts as consisting of single words (Bag

of Words), TonalityTech’s approach is flexible in order to account for more

complex text representations (n-Grams, Noun Phrases, Word

Combinations), which assists in capturing the semantics of texts.

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How to steer Tonality in corporate communications

TonalityTech provides an easy-to-use Microsoft Word Add-In to assist in writing

unambiguous capital market disclosures. The Add-In allows for the interactive

control of tonality and readability when writing capital market-oriented texts.

Figure 3 features an example view of TonalityTech’s Add-In for Microsoft Word.

Figure 3: Screenshot of the TonalityTech Add-In for Microsoft Word

The Tonality Add-In for MS Word offers a ribbon bar with several core functions,

including:

� Visualization of most relevant words: Based on the dictionary (DTD), the

Add-In highlights words that investors perceive negatively (red) and

positively (blue).

� Tonality dashboard: Analyze and improve corporate communication

throughout the writing process

• Objective assessment of the overall and sentence-level tonality from

the perspective of investors, based on the Big Data analytics of

TonalityTech

• Objective assessment of the overall and sentence-level readability

• The current selection features an intuitive replacement function that

suggests alternative words with more receptive tonality

� Reporting: The Add-In offers a PDF report and e-mail report function to

share analyses with peers and compare different text versions across

departments.

� Dynamic Dictionaries: Regular updates of the underlying dictionary (DTD)

ensure that the Add-In always reflects the most recent perception of

language by investors

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The value proposition of Tonality

The Add-In for MS Word by TonalityTech offers three core benefits to

communications practitioners:

• Process Efficiency gains: The Add-In offers an objective assessment of the

readability and tonality of corporate communication. Thus it speeds up the

process of creating news announcements, particularly when multiple

stakeholders are involved (e.g. Media, Investor Relations, Development,

Legal, Top Management).

• “Objective evidence-based communication”: Tonality enables Investor

Relations and Media Relations to communicate stock price-relevant facts

based on scientific evidence. Since different language conveys variable

tonality to recipients of the new information, TonalityTech enables the

evidence-based steering of tonality in press releases or capital market

communications.

• “Guide the positive perception of your communication”: As a result, the

focus on tonality guarantees that readers are not distracted by the wording

or by ambiguous sentences. Content and wording can be reconciled so that

the press release provides a clear, unbiased message to investors.

• “Drive corporate value through tonality”: The effect of tonality on

(abnormal) returns, i.e. returns normalized by the overall market reaction,

is statistically significant and persistent over time.

Figure 5 demonstrates how steering tonality can drive corporate value. This analysis

divides companies into three groups depending on the tonality of their news

announcements. The first group reflects communications with a very positive

tonality (top 25%). The third group reflects corporate communications with a very

negative tonality (bottom 25%). The remaining second group (mid 50%) represents

corporate communications with a more neutral tonality. Corporate communication

that manages to convey a more positive tonality (top 25%) yields on average 2.7

percent higher abnormal stock returns than corporate communication with a more

negative tonality (bottom 25%). This effect persists even when market expectations

are controlled for via a set of control variables, following on from / as found in

capital market and finance research.

Suppose the market capitalization of a company is $10 billion. Steering tonality

with TonalityTech’s evidence-based Add-In for MS Word can help to achieve

additional market capitalization of up to $270 million. Empirical observations show

that the Tonality effect is persistent over time. An announcement with a positive

(negative) tonality leads to an increase (decrease) in abnormal returns on the

announcement day. The effect of tonality on stock prices remains persistent over

time.

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Figure 4: The effect of Tonality on corporate value4

Conclusion

Language in capital market corporate disclosures is an important determinant of

subsequent stock market reactions. TonalityTech assists Investor Relations

practitioners in using language based on evidence of investor reactions with its

Add-In for MS Word, while also actively driving corporate value. The Add-In

provides an interactive tool to improve readability and sentiment, building on

scientific evidence. The easy-to-use Add-In for MS Word integrates seamlessly into

existing text composition processes and provides immediate value to practitioners

due to its self-explanatory setup.

4 Alfano S, Feuerriegel S, Neumann D: Do Pessimists Move Asset Prices? Evidence from Applying Prospect Theory to News sentiment

(Working Paper), University of Freiburg 2015.

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Contact information

TonalityTech Stefan Feuerriegel

Mail: contact@tonality-solutions.com Phone: +49 151 22 66 23 00

TonalityTech Hinterkirchstrasse 4

79108 Freiburg Germany

University of Freiburg University of Freiburg Prof. Dr. Dirk Neumann

Mail: dirk.neumann@is.uni-

freiburg.de Phone: +49 761 203 2395

University of Freiburg Platz der Alten Synagoge 79098 Freiburg Germany

Simon Alfano

Mail: simon.alfano@is.uni-freiburg.de Phone: +49 761 203 2400

University of Freiburg Platz der Alten Synagoge 79098 Freiburg Germany

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