Finance professor creates software to determine stock price reaction to news

AMES, Iowa -- Stockbrokers probably wish they had a crystal ball to predict the wild fluctuations in Wall Street stock prices since the economy's gone south. And while Iowa State University finance professor Arnold Cowan can't provide that, he created a software program that determines how stock prices react to significant corporate announcements.

Cowan created Eventus® some 20 years ago to study how events -- such as a CEO retirement announcement or a news story about a company's profits being down 5 percent -- affect stock prices. The software is primarily used by fellow investment researchers at such institutions as Georgetown, Harvard, Northwestern, Penn, Stanford, the University of Texas, and Stanford. But its most notable clients are the U.S. Securities and Exchange Commission and an office in the U.S. Department of the Treasury.

He's now authored an Eventus upgrade, due out this month. It expands upon the program's statistical capabilities and gives researchers greater options -- making it more user-friendly in the process.

Cowan says the program is still too technical for general consumer use, although it may indirectly help to shape some of their investment decisions.

"I think Eventus software and individual investors' personal portfolio decisions are probably a few stages removed from each other," he said. "But my software can help researchers draw conclusions that help professors teach their classes that help future stockbrokers, financial analysts, insurance agents, mutual fund managers and other such folks do a good job of advising the individual investor."

Eventus is not designed to forecast a specific stock price spike or collapse. But Cowan says it can be a valuable resource to analysts when a major announcement shakes a company -- like recent news by the big three U.S. automakers announcing significant losses, resulting in massive layoffs.

"At least we can use it to try and understand what has happened over the long haul until now," Cowan said. "As to what's going to happen in the future, we can look at how the stock price reacted last time. We can look at theories that explain how a stock will react to layoff news, and look at how those theories have been tested on multiple firms in the past and try and make some predictions based on that.

"At the same time, the market will do what the market will do. There always might be new information that nobody expected," he added.

Through research conducted with his program, Cowan knows when investors can expect the best and worst of times in a company's stock performance. And corporate losses and layoffs aren't on the top of that list.

"In terms of the magnitude of a negative event on an individual company's stock, it would be a scandal -- like Enron -- or a major failure, like a biotech company that had gone through an investigational phase of a new drug and it turns out that it hurts more patients than it helps, so they have to pull it," he said. "And on the upside, you tend to see rapid run-ups (in stock prices) with IPO (initial public offering) firms in good times -- such as when a standout like Google goes public and starts reporting success after success."

Cowan reports a modest increase in Eventus interest during Wall Street's recent stock price fluctuations. But because the program is primarily used by academic researchers, he says its sales aren't significantly impacted by current events.

Stockholders probably wish their investments were less affected by current events, too. But Cowan says investors need to be prepared for those kinds of price fluctuations before they choose to play the stock market.

"I've been telling students for years that stockholders are promised, essentially, nothing," Cowan said. "We have a term in finance classes and research to describe a stockholder and it's 'residual claimant' -- meaning you're entitled to the leftovers, which essentially is what profit is. So you do have to remember as a stockholder that you're buying ownership in a business, and you have to decide whether you can handle that risk."

Thanks to Cowan's software program, there may be a greater body of research on just how risky a stock investment may be based on news of the day.