Tyrone Schiff

Holding a Share in Achievement

Introduction

All around the world, economic activity takes place through the purchase and sale of

publicly traded companies on various exchanges. In London, people trade on the FTSE, and in

China, trading takes place on the Schenzen Stock Exchange. These exchanges, or markets, are

critically important to their respective country, because they act as a barometer of economic

prosperity. In the United States, stock in companies is generally traded on one of two exchanges,

the New York Stock Exchange or the NASDAQ. There are literally thousands of companies to

choose from on either one of these exchanges (NYSE, 2007). Every day, people invest exorbitant

amounts of money in hopes that their company’s stock will climb. Yet, there are terrible risks

associated with investing in the stock market as well. Stock prices move up or down every

trading day, which means that an investment is just as likely to go sour as it is to soar. Individuals

choose to invest in the stock market, instead of placing their money in a fixed-interest savings

accounts or government bonds, because they want to grow their assets faster and larger. Bonds

and savings accounts typically offer a constant interest rate, whereas, stocks in companies can

expand or contract enormously in a significantly shorter amount of time. The stock exchange

seems to follow the maxim, “with great risk comes great reward,” yet, simultaneously, there

exists substantial downside if you choose incorrectly.

As a result of wanting to be right more times than wrong, economists and pundits have

tried to establish methods to “predict” the future progress of a stock. Some methods include

technical analysis; in which most of the scrutiny is based on the stock’s chart over time, and

fundamental analysis; in which analysts look at financial statements, management techniques,

and competitive advantage of a company. However, the problem persists; sometimes they are
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right and sometimes they are wrong. This is by no means the only technique in assessing the

economic future. There are also economic indicators that look at the market more holistically

than just a single stock price, which try to predict the overall movement of the economy. An

abbreviated list of these indicators include the Consumer Price Index (CPI), Producer Price Index

(PPI), the unemployment rate, and interest rates. While these economic indicators are particularly

useful in understanding the future movement of the economy, they do little in predicting the

outcome of individual stocks. The trick, therefore, is to find a consistent indicator that is

measurable and reproducible that relates directly to a particular stock. It is my belief that

achievement motive imagery holds the key to unlocking this indicator. More specifically, the

achievement motive imagery contained within a company’s annual “Letter to the Stockholder,”

may have correlation to the future price of the stock in a company. The purpose of this paper will

therefore be to report my own findings along with plausible reasoning for why this may be the

case.

Prior Research

This study would not be possible without the empirical evidence and proven methods that

have already been gathered by Professor David G. Winter. He was instrumental in developing the

process of scoring texts for power motive imagery, affiliation motive imagery, and achievement

motive imagery. In particular, previous studies have shown, especially those done by David

McClelland, that levels of achievement motive imagery in texts lead to varying degrees of

economic success (McClelland, 1961). McClelland’s study revolved around the achievement

motive imagery found in children’s books in the 1920’s and 1950’s and their impact on various

economic factors (McClelland, 1961). He was able to prove that those countries that had higher

achievement scores in their children’s stories lead to greater economic growth (McClelland,
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1961). He looked at factors such as electricity produced in kilo-watt hours per capita and national

income in international units per capita (McClelland, 1961). With this as a basis, I wanted to

explore if there were other economic factors that may be the result of achievement motive

imagery.

Hypothesis

Before starting my research and analysis, I had some ideas as to the type of correlation

that may exist between the stock price of a company and the amount of achievement motive

imagery contained within the annual “Letter to the Stockholder.” I expected there to be a

correlation between high achievement motivation and an increase in the stock price. This runs in

sequence with the findings of McClelland that high achievement is representative of economic

success (McClelland, 1961). Furthermore, I anticipated the annual report to have immediate and

short-term impact. This means that from the time the “letter” was issued to the public, it would

have a quick effect on the stock price and would do so for no more than a year. Shareholders

would not respond to the “letter” for longer than a year, because a new one would come out in

the following year.

It should be understood that this was a largely comparative study of different publicly

traded companies. Thus, I expected those company’s “letters” who were comparatively lower in

their achievement motive imagery to perform worse than those with comparatively higher

achievement motive imagery. Therefore, I additionally expected there to be a continuum on

which achievement motive imagery could be plotted. Companies on the higher end of the

continuum would reap greater economic success than those on the lower end.
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Definitions

An annual report is compiled by a company and distributed to its shareholders. It contains

financial information about the company’s performance over the past fiscal year. In addition, it

may also include the company’s mission statement, invitation to the annual general meeting,

statement of directors' responsibilities, and the chief executive officer (CEO) and chairman’s

statements, commonly referred to as the “Letter to the Shareholders.” This “letter” usually

contains a summary of where the company has been over the past year, and where it intends to

go in the future. It will often warn the shareholders about the uncertain nature of their statement,

well exemplified by this disclaimer found in Caterpillar Inc.’s Annual Report, “Information

included in this Management’s Review is forward looking and involves risk and uncertainties

that could significantly impact expected results” (Caterpillar Inc., 1999).

There were five different companies that were used in this study. Caterpillar Inc. is

primarily involved in making construction and mining equipment (Caterpillar, 2007). They are

over 80 years old and are the largest business in the machine and engine industry (Caterpillar,

2007). General Electric (GE) is a large conglomerate business composed of various sectors, such

as: commercial finance, healthcare, industrial, infrastructure, money, and media (GE, 2007).

They currently own and operate NBC (GE, 2007). Merck & Co., Inc. (Merc) is a pharmaceutical

research institution that develops new vaccines and medicines (Merck, 2007). The Walt Disney

Company, perhaps best known for their animated characters like Mickey and Minnie Mouse, are

a comprehensive entertainment company (Disney, 2007). They are made up of four core

businesses which include Disney Studios, parks and resorts, consumer products, and media

networks (Disney, 2007). Finally, the Intel Corporation is a leading innovator in technology,

primarily focused on the creation of microprocessors used in desktop and laptop computers
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(Intel, 2007). According to Google Finance, all of these companies are in different sectors of the

US economy (Google Finance, 2007).

To be an owner of stock in a company means to partially own that company

(InvestorGuide, 2007). Ownership entitles the individual to have voting rights on issues that

affect the company (InvestorGuide, 2007). For each stock, or share in a company owned, the

owner is entitled to one vote. Companies typically distribute millions of shares in their stock.

Additionally, the stock price reveals the value of the company. If the value of a company that you

are invested in goes up, then your investment will similarly gain value. On the most basic level,

stock prices are dictated by the laws of supply and demand (TradingDay, 2004).

Methods

Five companies were selected to take part in this study. The companies selected could

either be from the same economic sector or from different ones. In this study, companies from

different sectors were used in order to evaluate the impact of achievement motive imagery across

the entire economy. The sectors included in this study were capital goods, conglomerates,

healthcare, services, and technology (Google Finance, 2007). The companies were picked for

their relative size within their sector, as well as, their generally established corporate identity.

Chances are that most people at the University of Michigan have had some sort of interaction

with at least one of these companies, if not all of them.

Once the companies were decided upon, an initial starting date from which to monitor the

stock price had to be chosen. Though the original stock price is critical in examining the progress

of the company over time, for this study, the start date was mostly arbitrary. It did relate,

however, to the annual reports that were chosen. Each one of the company’s 1998 Annual Report

was used in this study. Knowing that annual reports reflect information and ideas about the
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previous year, the starting date of Monday January 4, 1999, was decided as the initial price for

the stock. This happens to be a good opening date for the stock price, because it is the start of a

new year and all future performance from this date will be summarized in the next year’s Annual

report. The end date was chosen to be Tuesday January 3, 2007, because this allows for eight full

years of market activity.

The historical stock prices of each company were then compiled in order to watch its

growth or reduction. The prices were retrieved using Yahoo! Finance. In this study, the

company’s stock price was evaluated on a year-to-year basis. Therefore, the stock prices for each

company at the beginning of January of the subsequent years following 1999 were used as

reference points.

Two separate categories of measurement were then established. The first measurement

was of the initial stock price in relation to the different reference points. Thus, the 1999 price was

held constant compared to 2000, 2001, etc., for percent increase/decrease. This measurement

expresses the stock prices’ overall percentage change over the eight year period. This is

equivalent to investing in 1999 and leaving your investment for eight years. The second

measurement looked at the growth or reduction of the stock over a single year. In this case, 1999

was compared to 2000, 2000 was compared to 2001, 2001 to 2002, etc. Again, for each company

the percent increase/decrease was recorded. This is equivalent to investing for a year at a time.

Following this, the “Letter to the Shareholders” contained within each company’s 1998 Annual

Report was coded for achievement motive imagery using the abridged scoring in “running text”

provided by Professor Winter. The amounts of achievement images in each document were then

counted. By using the “word count” tool in Microsoft Word, the amount of words in each

company’s “Letter to the Shareholder” was counted. By dividing the total achievement images
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for each document by the number of words in each document, and then multiplying by 1,000

gives a rate of images per 1,000 words for each document.

Results

After performing the achievement motive imagery coding of the 1998 “Letters to the

Shareholders,” I am able to report the following set of information. Caterpillar Inc. had the

highest rate of 146.59 images/1000 words. Second was the Intel Corporation with 88.76

images/1000 words. Third was General Electric with 84.28 images/1000 words. Fourth was

Merck Co., & Inc. with 83.07 images/1000 words. The Walt Disney Company was last with a

rate of 68.21 images/1000 words.

Therefore, I would expect to see that somewhere during the 1999 to 2007 time period,

Caterpillar would have the highest percent increase, followed by Intel, GE, Merck, and Disney.

This order in percent increase correlates to the growth seen in all five companies between the

year 2001 and 2002. In this year, Caterpillar’s stock grew by 17%, Intel fell by 5%, GE fell by

17%, Merck fell by 26%, and Disney fell by 30%. Results are summarized in Figure 1.

Figure 1

Caterpillar Intel GE Merck Disney

Achievement Score 146.59 88.76 84.28 83.07 68.21
Stock Price: ‘01 19.06 34.53 38.81 62.05 28.65
Stock Price: ‘02 22.30 32.78 31.85 45.56 20.03
% Change ‘01-‘02 +17.00 -5.07 -17.93 -26.57 -30.09

Discussion

As you can see, during the year of 2001 to 2002 there appears to be a correlation in the

achievement motive imagery scores and the relative move of each company’s stock price. The
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first thing to address is that this correlation occurred in the year from 2001 to 2002, which was

two full years after the original start date and publication of the “Letter to the Shareholders.” One

reason that explains for this delay is a principle in economics called lag time (Burdick, 2006).

Typically, lag time is associated with economic indicators like CPI, PPI, unemployment, and

interest rate changes. All of these economic indicators take the whole economy into account, and

the economy often reacts slowly. Measuring these indicators is easy. According the US

Department of Labor, the CPI calculates the, “monthly data on changes in the prices paid by

urban consumers for a representative basket of goods and services” (Consumer Price Index,

2007). Figuring out how much these goods have changed does not take a long time, yet the effect

it has on the economy can take months to set in. This may be the case with the “letter.”

Shareholders may assess what their CEO has to say but may not act on it immediately.

However, an even stronger case for why there is a lag time between the “letter” and the

period in which there is a correlation between achievement motive and stock price percent

change may be due to the very nature of the “letter.” When CEOs and corporate management

compile the “letter,” they include a lot of statements that could be described as “forward-

looking” or even “visionary.” Much of the “letter” discusses what is to happen, not what has

already happened. Interestingly, one of the five criteria on which to determine achievement

motivation is, “Goals or performances described in ways that suggest positive evaluation”

(Winter, 1987). Therefore, higher achievement motivation may mean a higher frequency of

evaluating goals positively. This positive evaluation that becomes associated with a new

initiative will therefore resonate positively in the reader of the “letter.” Remember, the readers of

the “letter” are the shareholders. Shareholders could be people just like you and me. Essentially,

the shareholders of a company are its greatest allies. Shareholders can act as advocates for the
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company, essentially reiterating the positive evaluation that they read in the “letter” and sharing

this news with their friends and co-workers. If a majority of people walk away from the “letter”

with an overall positive feeling about a future initiative, then this may add to the likelihood of

success for that proposed goal. Furthermore, it takes a company a while to fully implement new

initiatives. It may even take more time for that company to reap the benefits of the initial goal.

All in all, this may account for the two year lag time on the effect on the stock price.

Figure 1 reveals that not all, actually four, of the companies in this study had a negative

percentage change from 2001 to 2002.This leads me to a further understanding of how the

achievement motive imagery score actually relates to stock price. It appears as though the raw

score itself means nothing, but only until it is compared with other samples does it gain meaning.

This suggests that the achievement motive imagery score does not reflect how the stock itself

will perform, but it will tell you how it will perform relative to a basket of stocks. This is the case

here. I know 146 is bigger than 88, but I am not sure what impact this difference in score will

have on the stock price or percent change exactly.

Finally, and perhaps most importantly, what are the implications of knowing that

achievement motive imagery may have an effect on future stock price? The significance is both

great and small at the same time. As I have noted, the achievement motive imagery score may

mean nothing on its own, and therefore, while a CEO or Chairman of the Board is writing the

“Letter to the Stockholder” he or she cannot know what the relative scores in achievement

motive imagery are across the entire market. Knowing that this correlation may exist however,

the CEO or Chairman can improve the company’s chances of success in the future by infusing

the “Letter to the Stockholder” with as much achievement imagery as possible.

Future Study
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There are a lot of different avenues to explore in potential future study on this topic. First

and foremost, one will notice that there is no statistical evaluation within this study, only an

observation of a correlation. In the future, it would be helpful to add that statistical analysis to

provide validity to the findings. In order to show that this correlation exists, this study would

need to be performed many more times with even more companies in the sample size. If the

relation between achievement motive imagery and relative percent change of the stock price

holds, then this will legitimize the correlation even further. Additionally, it would be interesting

to evaluate companies from the same sector to see if there are differences in their reaction to

achievement imagery. All of the companies used in this study are sizeable; at least above $40

billion in market capital. Perhaps smaller companies that are publicly traded react in a different

way to large companies. There may also be more relevance to the achievement motive score than

just meets the eye. Perhaps there is a break even achievement motive score that can predict for a

minimum of zero percent change over a year. There is still a lot more to be discovered in the

relationship between the “Letter to the Shareholders” and achievement motive imagery.

References

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