Abstract
We explore a subtle but important mechanism through which firms can control information flow to the markets. We find that firms that their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 149 basis points per month, or almost 18 percent per year. We find similar evidence in an international sample of earnings call transcripts from the UK, Canada, France, and Japan. Firms with higher discretionary accruals, firms that barely meet/exceed earnings expectations, and firms (and their executives) that are about to issue equity, sell shares, and exercise options, are all significantly more likely to cast their earnings calls.
Highlights
Background and Literature ReviewOur paper adds to a large literature examining firms’ attempts to manage their information environments, the manner in which firms disclose information to the markets, and the impact of different forms of disclosure on various stakeholder groups
We show that casting firms experience higher contemporaneous returns on the call in question, but negative returns in the future
These negative future returns are concentrated around future calls where they stop this casting behavior, and allow negative information to be revealed to the market
Summary
Our paper adds to a large literature examining firms’ attempts to manage their information environments, the manner in which firms disclose information to the markets, and the impact of different forms of disclosure on various stakeholder groups (e.g., investors, customers, regulators, media, etc.). Our paper is unique in that we take as given the “level playing field” imposed by Regulation Fair Disclosure (RegFD), and explore the subtle choices firms can make even within this seemingly strict information disclosure environment, choices that can (as we document) have large impacts on market prices and firm outcomes. A recent strand of the literature examines management communication during conference calls and its association with information content (Hollander, Pronk and Roelofsen (2010), Matsumoto, Pronk and Roelofsen (2011)), future performance (Mayew and Venkatachalam (2012)) and financial fraud and misreporting (Larcker and Zakolyukina (2011), and Hobson, Mayew and Venkatachalam (2012)). Mayew (2008) and Mayew, Sharp, and Venkatachalam (2011) explore differential analyst participation on conference calls, but focus on its implications for analyst accuracy; our focus is on the firms engaging in this type of behavior, and the signal that this behavior conveys for future firm outcomes
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