Abstract
Executives often blame external factors for their own bad performance. I propose a textual analysis-based measure to detect when corporate executives blame bad performance on external factors such as industry and economy (or BLAME measure). Using this methodology to analyze quarterly earnings announcement conference call transcripts, I find that: (1) these attribution behaviors are negatively related to the financial performance, indicating a higher desire to attribute bad performance to external factors; (2) a high BLAME measure predicts low returns subsequent to the conference call date after controlling for the tone of the transcripts and other known predictive variables. The hedged portfolio that takes long positions in companies with low BLAME measure and short positions in companies with high BLAME measure generates abnormal returns as high as 7% per year; (3) BLAME measure negatively predicts SUE and analyst recommendation revision in the subsequent quarter, indicating underreaction to firm-specific negative information; (4) a high BLAME measure reduces turnover performance sensitivity. Overall, the evidence suggests that investors underreact to negative information when managers attribute bad performance to negative external factors.
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