An Investigation of Analysts' Praise of Management During Earnings Conference Calls

ABSTRACT

Through the textual analysis of a large sample of earnings conference calls, the authors find that analysts praise management on over half of earnings conference calls by saying complimentary phrases such as “congratulations on the great quarter.” The results show that analysts' complimentary phrases reflect the nature of the information released at the earnings announcement. The authors find that the amount of praise by analysts on an earnings conference call is strongly associated with the earnings surprise and to a greater extent the earnings announcement stock return. They also find that there is value to investors in tracking analysts' flattery of management during earnings conference calls, as it predicts abnormal stock returns over the following quarter. The findings, which are incremental to prior research on the tone of earnings conference calls, highlight a previously ignored aspect of analyst feedback.

KEYWORDS:

• Earnings conference calls
• Textual analysis
• Analyst feedback
• Compliments
• Praise
• Flattery

Acknowledgments

The authors thank Andrew Leone for instruction on textual analysis, Elio Alfonso, Brent Lao, and Kelly Huang for helpful comments, and Mohammed Nazrul Islam, Martin Kim, and Sheng Yi for excellent research assistance.

Notes

1. On his television show Mad Money, Jim Cramer suggests that investors track the number of “congratulations” spoken by the analysts during a firm's earnings conference call (see the 4:17 and 4:18 clips from the March 18, 2010 episode, available at: https://archive.org/details/CNBC_20100318_080000_Mad_Money#start/1080/end/1140). We are unaware of any empirical evidence on the validity of this suggestion.

2. Throughout the article, we use the terms compliments, praise, and flattery interchangeably.

3. Studies examining conference call tone include: Allee and DeAngelis [2015], Price et al. [2012], Brockman, Li, and Price [2015], Druz, Wagner, and Zeckhauser [2014], J. V. Chen, Nagar, and Schoenfeld [2014], and Sinha and Huang [2014].

4. Price et al. [2012] used the Harvard General Inquirer and Henry [2008] word lists. Allee and DeAngelis [2015], Druz, Wagner, and Zeckhauser [2014], Brockman, Li, and Price [2015], J. V. Chen, Nagar, and Schoenfeld [2014], and Sinha and Huang [2014] used the Loughran and McDonald [2011] word lists.

5. We focused solely on analysts' praise of management because we did not come across any instances of analysts' overtly criticizing a firm's management or performance in our reading of earnings conference call transcripts.

6. Another potential explanation is that analysts' compliments preempt revisions in analyst forecasts. However, in untabulated results, we do not find that abnormal returns are concentrated in the first few days after the earnings announcement, which is the time when analysts most commonly revise their forecasts (e.g., Ivkovic and Jegadeesh [2004]) and we continue to find evidence of a drift after controlling for analysts' earnings forecast revisions occurring in the week following the earnings conference call.

7. The verbal praise by analysts on earnings conference calls is directed towards the firm's management, whereas changes in analysts' forecasts, stock price targets, or recommendations can occur for a multitude of reasons unrelated to management performance such as macroeconomic factors.

8. Studies on earnings conference call attributes examine: vocal cues (Hobson, Mayew, and Venkatachalam [2012], Mayew and Venkatachalam [2012]), linguistic complexity (Bushee, Gow, and Taylor [2013], Brochet, Naranjo, and Yu [2016]), analyst participation (Mayew, Sharp, and Venkatachalam [2013]), the absence of questions (S. Chen, Hollander, and Law 2015]), time horizon (Brochet, Loumioti, and Serafeim [2016]), and tone (Allee and DeAngelis [2015], Price et al. [2012], Brockman, Li, and Price [2015], Druz, Wagner, and Zeckhauser [2014], J. V. Chen, Nagar, and Schoenfeld [2014], Sinha and Huang [2014]).