Hyperbole or Reality? Investor Response to Extreme Language in Earnings Conference Calls

Abstract

We develop a dictionary of linguistic extremity using the words and phrases spoken in earnings conference calls and analyze how investors react to this extreme language. We document that investors respond more strongly to extreme, rather than moderate, language in earnings conference calls as evidenced by significantly higher abnormal trading volume and stock returns around the calls. Further, these results are more pronounced for firms with weaker information environments. We also find that linguistic extremity contains information about a firm's future operating performance and there is a strong association between extreme tone and analyst forecast revisions following the calls. Our results suggest that investors are influenced not just by what managers say when communicating performance, but also how they say it, with extreme language largely reflecting reality, rather than hyperbole.