Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity on Conference Calls?

Abstract

This paper examines whether analysts and investors efficiently incorporate the informational signals from managerial linguistic complexity (e.g. Fog) on conference calls into their forecasts and trading decisions. We predict that managerial linguistic complexity provides a signal of the manager’s private information through their willingness to engage with analyst questions. We find that managerial linguistic complexity related to informative technical disclosure provides a positive signal of future earnings growth, whereas obfuscatory linguistic complexity predicts lower future earnings growth. We also find that, as active call participants, analysts efficiently revise their forecasts to incorporate the positive (negative) signal in informative (obfuscatory) Fog. However, as passive participants, investors only correctly interpret the negative signal of obfuscation during the call; we find a delayed price reaction to informative Fog. When we examine calls during which buy-side investors ask questions, we then find a significant contemporary association between stock returns and informative Fog, with no delayed price reaction. This finding underlines the importance of call participation for efficiently incorporating the positive signal of informative linguistic complexity.