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.
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 [Citation2015], Price et al. [Citation2012], Brockman, Li, and Price [Citation2015], Druz, Wagner, and Zeckhauser [Citation2014], J. V. Chen, Nagar, and Schoenfeld [Citation2014], and Sinha and Huang [Citation2014].
4. Price et al. [2012] used the Harvard General Inquirer and Henry [Citation2008] word lists. Allee and DeAngelis [Citation2015], Druz, Wagner, and Zeckhauser [Citation2014], Brockman, Li, and Price [Citation2015], J. V. Chen, Nagar, and Schoenfeld [Citation2014], and Sinha and Huang [Citation2014] used the Loughran and McDonald [Citation2011] 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 [Citation2004]) 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 [Citation2012], Mayew and Venkatachalam [Citation2012]), linguistic complexity (Bushee, Gow, and Taylor [Citation2013], Brochet, Naranjo, and Yu [Citation2016]), analyst participation (Mayew, Sharp, and Venkatachalam [2013]), the absence of questions (S. Chen, Hollander, and Law Citation2015]), time horizon (Brochet, Loumioti, and Serafeim [Citation2016]), and tone (Allee and DeAngelis [Citation2015], Price et al. [Citation2012], Brockman, Li, and Price [Citation2015], Druz, Wagner, and Zeckhauser [Citation2014], J. V. Chen, Nagar, and Schoenfeld [Citation2014], Sinha and Huang [Citation2014]).
Allee, K. D. and M. D. DeAngelis. “The Structure of Voluntary Disclosure Narratives: Evidence from Tone Dispersion.” Journal of Accounting Research, 53, (2015), pp. 241–274. Price, S. M., J. S. Doran, D. R. Peterson, and B. A. Bliss. “Earnings Conference Calls and Stock Returns: The Incremental Informativeness of Textual Tone.” Journal of Banking & Finance, 36, (2012), pp. 992–1011. Brockman, P., X. Li, and S. M. Price. (2015). “Differences in Conference Call Tones: Managers vs. Analysts.” Financial Analysts Journal, 71, (2015), pp. 24–42. Druz, M., A. F. Wagner, and R. J. Zeckhauser. “How Analysts and the Market Read between the Lines of Conference Calls.” Working Paper, Harvard University (2014). Chen, J. V., V. Nagar, and J. Schoenfeld. “Sources of Analyst Expertise.” Working Paper, University of Michigan (2014). Sinha, P. and X. Huang. “The Role of Financial Analysts' Tone in Interpreting Management Disclosure Tone in Conference Calls.” California State University, Working Paper, Long Beach, (2014). Henry, E. “Are Investors Influenced by How Earnings Press Releases are Written?” The Journal of Business Communication, 45, (2008), pp. 363–407. Allee, K. D. and M. D. DeAngelis. “The Structure of Voluntary Disclosure Narratives: Evidence from Tone Dispersion.” Journal of Accounting Research, 53, (2015), pp. 241–274. Druz, M., A. F. Wagner, and R. J. Zeckhauser. “How Analysts and the Market Read between the Lines of Conference Calls.” Working Paper, Harvard University (2014). Brockman, P., X. Li, and S. M. Price. (2015). “Differences in Conference Call Tones: Managers vs. Analysts.” Financial Analysts Journal, 71, (2015), pp. 24–42. Chen, J. V., V. Nagar, and J. Schoenfeld. “Sources of Analyst Expertise.” Working Paper, University of Michigan (2014). Sinha, P. and X. Huang. “The Role of Financial Analysts' Tone in Interpreting Management Disclosure Tone in Conference Calls.” California State University, Working Paper, Long Beach, (2014). Loughran, T. and B. McDonald. “When is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10-Ks.” Journal of Finance, 66, (2011), pp. 35–65. Ivkovic, Z. and N. Jegadeesh. “The Timing and Value of Forecast and Recommendation Revisions.” Journal of Financial Economics, 73, (2004), pp. 433–463. Mayew, W. J. and M. Venkatachalam. “The Power of Voice: Managerial Affective States and Future Firm Performance.” Journal of Finance, 67, (2012), pp. 1–43. Mayew, W. J. and M. Venkatachalam. “The Power of Voice: Managerial Affective States and Future Firm Performance.” Journal of Finance, 67, (2012), pp. 1–43. Bushee, B. J., I. D. Gow, and D. J. Taylor. “Linguistic Complexity in Firm Disclosures: Obfuscation or information?” Working Paper, University of Pennsylvania (2013). Brochet, F., P. Naranjo, and G. Yu. “The Capital Market Consequences of Language Barriers in the Conference Calls of Non-U.S. Firms. The Accounting Review, 91, (2016), pp. 1023–1049. Chen, S., S. Hollander, and K. Law. “The Price of Silence: When No One Asks Questions during Conference Calls.” Working Paper, University of Texas at Austin (2015). Brochet, F., P. Naranjo, and G. Yu. “The Capital Market Consequences of Language Barriers in the Conference Calls of Non-U.S. Firms. The Accounting Review, 91, (2016), pp. 1023–1049. Allee, K. D. and M. D. DeAngelis. “The Structure of Voluntary Disclosure Narratives: Evidence from Tone Dispersion.” Journal of Accounting Research, 53, (2015), pp. 241–274. Price, S. M., J. S. Doran, D. R. Peterson, and B. A. Bliss. “Earnings Conference Calls and Stock Returns: The Incremental Informativeness of Textual Tone.” Journal of Banking & Finance, 36, (2012), pp. 992–1011. Brockman, P., X. Li, and S. M. Price. (2015). “Differences in Conference Call Tones: Managers vs. Analysts.” Financial Analysts Journal, 71, (2015), pp. 24–42. Druz, M., A. F. Wagner, and R. J. Zeckhauser. “How Analysts and the Market Read between the Lines of Conference Calls.” Working Paper, Harvard University (2014). Chen, J. V., V. Nagar, and J. Schoenfeld. “Sources of Analyst Expertise.” Working Paper, University of Michigan (2014). Druz, M., A. F. Wagner, and R. J. Zeckhauser. “How Analysts and the Market Read between the Lines of Conference Calls.” Working Paper, Harvard University (2014).