Public Earnings Research Articles

Do buy-side analysts in earnings conference calls manipulate stock prices?

We investigate the generalizability of widely perceived notions that buy-side analysts try to influence or manipulate a firm’s stock price by praising or criticizing management during a public earnings conference call. Despite two institutional factors that make it difficult to detect empirically, we find some evidence of stock influence behavior by using a combination of data on conference call transcripts and trading by the institutions that employ the buy-side analysts. However, we also find evidence consistent with the null hypothesis that buy-side analysts are acquiring information rather than manipulating the stock price. Subsample analyses suggest that stock influence is more detectable among hedge funds, while information acquisition is the norm among traditional buy-and-hold institutions. The evidence we provide on each behavior should be of interest to firm managers who host conference calls, market participants who use conference calls to collect company information, as well as regulators who monitor for possible market manipulation.

Delegated Bank Monitoring by Bond Investors: Evidence from Japanese Main Banks

We investigate whether bank monitoring based on private information in private debt reduces the reliance on public earnings information in public debt. We focus on Japanese main banks, which have a high ability to access the private information of borrowing firms by exploiting their position as both large creditors and shareholders. Previous studies show that the Japanese main bank has a strong incentive to monitor borrowing firms when they are performing poorly, while it never intervenes in their management as long as their financial performance is stable. We find that under stable financial conditions in bond-issuing firms, accrual quality is negatively associated with bond yield spreads. In contrast, when bond-issuing firms with a main bank have a high default risk, there is no relationship between accruals quality and bond yield spread. The results suggest that when a main bank has a stronger incentive to monitor its borrowing firms, bondholders are more likely to delegate the screening role to the main bank with private information, leading to a reduction in the reliance on firms’ public earnings information in bond contracts.

Curbing Enthusiasm: Media Sentiment and the Disciplining Role of Quarterly Earnings Announcements

ABSTRACT A longstanding literature suggests that earnings provide the market with relevant information about firm performance, but one often overlooked benefit is their role in disciplining market expectations. This study examines the role of earnings announcements in constraining potential mispricing associated with firm-specific media sentiment. We show that media sentiment-driven quarterly returns (orthogonal to risk factors and fundamental news) largely reverse when public earnings are released. Our results suggest that quarterly earnings announcements play an important role in reducing media sentiment-related mispricing. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; L82; M41.

Ethnic Minority Analysts’ Participation in Public Earnings Conference Calls

ABSTRACTWe investigate ethnic minority and nonminority sell‐side analysts’ participation in public earnings conference calls. We find that minority analysts are underrepresented in conference call Q&A sessions, and minority analysts who do participate on the calls experience lower levels of prioritization than do nonminority analysts. Minority analysts’ lower participation rates are partially but not fully mediated by characteristics such as experience, work environment, and stock rating favorability. Additionally, firm and conference call fixed effects mediate approximately half the magnitude of lower minority participation rates. Extroverted minority analysts participate at higher rates, but the negative association between minority status and conference call participation is exacerbated when calls are more time constrained, when executive teams are less diverse, and when analysts are from less prestigious brokerage houses. Overall, we document the underrepresentation of minority analysts on earnings conference calls and provide evidence suggesting both analysts’ and managers’ choices influence minority analysts’ participation rates.

Managers’ use of humor on public earnings conference calls

Managers’ use of humor on public earnings conference calls

Legal risk and information spillover through private lender reports

We investigate the effect of legal risk on private information spillover from syndicated loan borrowers to equity markets. We find evidence that is consistent with leakage of information provided to institutional investors in monthly private reports. We expect that insiders avoid the adverse consequences of noise trading by timing trades closely before public announcements. Consistent with this expectation, during a period of low legal risk, we observe abnormal stock returns just before public earnings releases. When legal risk increases, the information leakage decreases. We also find that reputational risk mitigates insider trading after private information releases.

Short-Selling and Information Arrival around Earnings Announcements: Evidence from Regulation SHO

ABSTRACTShort sellers assist in impounding negative news more quickly into stock prices and improve price informativeness. However, there is a lack of consistent evidence about whether short sellers trade predominantly in anticipation of, or in response to, a public information release. To shed light on this question, we exploit Reg SHO, which reduced the constraints faced by short sellers for a subsample of U.S. firms, to examine price informativeness before, during, and after earnings announcements. We show that relative to control firms, pilot firms have greater (less) price informativeness before (during) earnings announcements, suggesting that short sellers trade in anticipation of public earnings news, rather than in response to the public news.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: M40; M41; M48.

Which buy-side institutions participate in public earnings conference calls? Implications for capital markets and sell-side coverage

We examine the participation of analysts from different buy-side institutions (hedge funds, mutual funds, and RIAs) in public earnings conference calls and the associated capital market implications. Using 81,652 conference call transcripts for 3346 companies from 2007 to 2016, we find that buy-side analysts ask questions on approximately 18% of calls. Relative to sell-side analysts, buy-side analysts' interactions with management are shorter, convey less favorable tone, and exhibit more uncertainty. Buy-side activity on earnings calls is also associated with subsequent reductions in sell-side coverage, and buy-side tone is associated with sell-side analysts' price target revisions after the call. Importantly, our findings suggest that buy-side analysts representing a hedge fund play an important and unique role on conference calls. Specifically, hedge fund analysts represent nearly half (47%) of all buy-side appearances. In addition, when short interest in the firm is high, analysts representing a hedge fund are less likely to be permitted to ask the first question on the call, to ask lengthy questions, or to ask additional follow-up questions. Relatedly, relative to other buy-side analysts, the information conveyed by hedge fund analysts during the call is more strongly associated with both stock returns and investor uncertainty following the call.

THE IMPACT OF THE ANTI-CORRUPTION CAMPAIGN ON INCOME DISTRIBUTION: EVIDENCE FROM CHINA

This paper provides the first systematic micro-level evidences on the effectiveness of anti-corruption campaign in disciplining public officials and its impact on income distribution. Based on China Household Income Project (CHIP) survey data 2007 and 2013, we found that party and government officials had significant hidden income and the public–private earnings gap was as high as 8% before the campaign. However, the hidden income become not significant and the earnings gap declined to [Formula: see text]18% in this post-campaign period. The regions inspected by central anti-corruption inspection groups experience larger public earnings penalties compared to the other regions. Overall, our findings suggest that the privilege of public officials declined sharply during this anti-corruption campaign.

Retail Investor Trading and Market Reactions to Earnings Announcements

This paper uses holdings and outage data from Robinhood and transaction-level data from U.S. exchanges to examine how retail investors affect the pricing of public earnings information. We find that retail trader activity is associated with prices that are more responsive to earnings surprises, and earnings announcements affected by seemingly random retail trading outages experience weaker price responses. These results are concentrated in firms that are smaller and have less robust informational environments. Additional evidence shows that the retail activity is associated with more volatile returns during the earnings announcement window, which can slow the incorporation of public information and contribute to larger bid-ask spreads. Overall, our results suggest that retail investors can facilitate the incorporation of public information into price over the 2-day earnings announcement window despite the potential to increase volatility and impose risk on other market participants.

Investors’ behavior to earnings announcement during the COVID-19 pandemic: Evidence from Cambodia

ABSTRACT This study investigates the reaction of investors to annual earnings releases as reflected in the share price movements of common stocks and volume of trade during the COVID-19 pandemic. Event methodology is employed, and the returns in an event window, defined conventionally as the days before to days after a firm-specific public earnings announcement, are not abnormal. We provide an apparent example where investors did not react to firm-specific positive earnings announcements. This could be influenced by the government in response to COVID-19 as we have seen governments and central banks worldwide quickly enacted sweeping and sizable fiscal and monetary stimulus measures to limit the human and economic impact of the COVID-19 pandemic. These actions during an economic downturn or crisis have helped to stabilize the economy and increase confidence in the market. Keywords: Event study, information and market efficiency, corporate earnings announcement, COVID-19, Cambodia market

A Level Playing Field? Empirical Evidence That Ethnic Minority Analysts Face Unequal Access to Corporate Managers

We investigate whether ethnic minority analysts face unique barriers to management access. We find managers are less likely to select minority analysts to participate in the Q&A session of public earnings conference calls, and minority analysts selected to participate receive lower levels of prioritization and engagement than nonminority analysts. Minority analysts’ unequal access to management persists over time, and their access does not improve with companies recognized for workplace diversity. However, we find some evidence that diverse executive teams are associated with more favorable participation outcomes for minority analysts. The consequences of unequal treatment extend beyond conference calls, as investors are less likely to vote for minority analysts as Institutional Investor All-Stars.

The Information in Trade Financing

We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) by long only fund managers who possess a positive short-lived private signal and self finance informed stock purchases by selling an equivalent dollar amount of stock in the same industry. Despite constituting a small fraction of their trading activity, 37% of fund trading profits are attributable to INSFIT over a ten-day horizon. INSFIT also precedes the release of public earnings information and corporate disclosures. The prevalence of relative valuation as well as the need to hedge industry exposure motivate INSFIT’s industry neutrality. Furthermore, INSFIT occurs more frequently among cash-constrained managers but is uncorrelated across fund managers. Although INSFIT involves relatively large dollar-denominated trades, transaction costs cannot account for its profitability.

Analysts’ and Managers’ Use of Humor on Public Earnings Conference Calls

Despite the prevalence and importance of humor in interpersonal communication, the disclosure literature is silent on the use of humor in the context of corporate communications. We examine analysts’ and managers’ use of humor during public earnings conference calls. Using a sample of nearly 90,000 conference calls from 2003–2016, we find that experienced analysts and analysts with positive views of the company are more likely than other analysts to use humor on conference calls. We also find that analysts who use humor on conference calls are allowed to speak for a longer period of time and receive longer responses from managers, and that analysts tend to use humor when the tone of their question is unusually negative. When managers use humor, analysts’ stock recommendation revisions following the call are more positive, and the tone of the company’s media coverage is more favorable. Our study provides new evidence on the use of humor in corporate disclosure events, and our findings indicate that humor has a meaningful influence on the outcomes of public earnings conference calls.

Managing the narrative: Investor relations officers and corporate disclosure✰

Investor relations officers (IROs) play a central role in corporate communications with Wall Street. We survey 610 IROs at U.S. public companies and conduct 14 follow-up interviews to deepen our understanding of the role of IROs in corporate disclosure events. Three important themes emerge from our results: (i) the value, nature, and timing of private communication between IROs, analysts, and investors; (ii) the significant influence IROs have on corporate disclosures; and (iii) the degree of “theater” involved in public earnings conference calls, even the Q&A portion. We provide insights into the investor relations, analyst, institutional investor, and disclosure literatures.

Equity market interactions

PurposeThe purpose of this paper is to contribute to the sociology of financial analysis by exploring how sell-side analysts enact their professional roles during public earnings presentations. It addresses the following research question: How do analysts perform their professional roles in interactions with managers, fund managers and other analysts?Design/methodology/approachThe research adopts a dramaturgical analysis of analysts’ interactions with managers and fund managers. The empirical material includes 50 hours of direct observations of earnings presentations and 21 interviews with analysts, managers and other relevant actors.FindingsThe findings show that analysts struggle with role conflicts because they need to satisfy the contrasting demands of managers, fund managers and colleagues. Performing the role of an expert critic mainly depends on the approval of managers; yet, analysts also find themselves in situations where they must confront the managers. To counter role conflicts and sustain their role performance, analysts also produce displays of role distance and carefully prepare to meet their audiences’ expectations. To maintain the role of the expert critic, analysts depend on both those taking their advice (fund managers) and those being reviewed (managers).Originality/valueThis study is one of few empirically rich investigations of analysts’ activities, interactions with managers and meetings with multiple audiences. It also contributes to previous interview studies using dramaturgical analysis by offering in-depth observations of a single, distinct situated activity system.

Public news announcements, short-sale restriction and informational efficiency

In this paper, we address the question that with differences in opinion in reality, how quickly stocks incorporate news shocks when they are subject to different levels of short-sale constraints. Specifically, we examine the impact of short-sale restriction on stock price efficiency when firms make public earnings announcements. Using data from the Hong Kong stock market, where some stocks are eligible for and others are prohibited from short selling, we find significantly lower post-announcement returns with high economic magnitude for short-sale prohibited stocks with both positive and negative news shocks. The reduction in informational efficiency due to short-sale restriction persists several months after the earnings announcement. The informational inefficiency due to short-sale restriction is particularly severe for firms with negative announcement period shocks and subject to greater differences in opinion.

Working on the weekend: Do analysts strategically time the release of their recommendation revisions?

We examine whether financial analysts strategically time the announcement of their recommendation revisions consistent with their incentives to maintain relations with management. We provide evidence that investor and media attention to recommendation revisions is reduced on weekends, which analysts can exploit to strategically time the release of their revisions. We find that downgrades are a higher proportion of weekend revisions than weekday revisions and that analysts with characteristics that suggest they possess the strongest incentives to maintain favor with management are more likely to downgrade on the weekend. In contrast, analysts absent these characteristics are more likely to release downgrades during the week, consistent with these analysts being driven primarily by other incentives, such as the timely release of their recommendation and garnering media attention. We also present evidence suggesting that strategic disclosure of recommendation downgrades is associated with greater access to management on public earnings conference calls.

Investors’ behaviour in regard to company earnings announcements during the recession period: evidence from the Macedonian stock exchange

The study investigates the reaction of investors to annual earnings releases as reflected in the volume and price movements of common stocks during a recession. We provide an apparent example where investors did not react to firm-specific positive earnings announcements. Event methodology is employed, and the returns in an event window, defined conventionally as the day before to two days after a firm-specific public earnings announcement, are not abnormal. The volume of trade in the event window is not atypical either. The psychological impact on the investors was such that fear could not be alleviated by the good news and good financial results.

Managing the Narrative: Investor Relations Officers and Corporate Disclosure

Investor relations officers (IROs) play a central role in corporate communications with Wall Street. We survey 610 IROs at publicly traded U.S. companies and conduct 14 follow-up interviews to gain insights into the nature of their interactions with sell-side analysts and institutional investors, and to deepen our understanding of the role of IROs in corporate disclosure events. Three important themes emerge from our results: (i) the value, nature, and timing of private communication between IROs, analysts, and investors; (ii) the significant influence IROs have on corporate disclosures; and (iii) the degree of “theater” involved in public earnings conference calls. We explore numerous topics that IROs are uniquely suited to address, and we provide new insights into the investor relations, analyst, institutional investor, and disclosure literatures.