Credibility Signals from Soft Information: Evidence from Investor Reactions to Tone in Earnings Conference Calls

Abstract

Research assigns significant share price relevance to linguistic tone in earnings conference calls. Tone is, however, only one facet in the mosaic of the soft information that is disseminated in the interactive conference call setting. We argue that investors exploit further aspects of this soft information to simultaneously assess the tone’s credibility. Drawing on the communication literature, we focus on the role of perceived sender and message credibility in conference calls in altering investor reactions to tone. We measure sender credibility as the trustworthiness originating from the manager’s perceived personality (i.e., Big 5 traits), and message credibility as characteristics of a credible communication style and structure. We find corroborating evidence that investor reactions to tone are stronger in the presence of higher sender and message credibility. We also find the credibility effect to be stronger in weaker information environments, where we expect the reliance on simultaneously perceived credibility signals from soft information to be higher. Finally, we find that sender and message credibility strongly attenuate the negative post-conference-call drift in the investor reaction to tone. Our results provide evidence that investors benefit from considering credibility signals from the simultaneously perceived soft information when reacting to tone in conference calls.