How to listen for the hidden data in earnings calls
the language used during earnings calls can be quite valuable
what is earning call
Earnings calls are the periodic conference calls a company’s executives hold with investors and analysts to discuss financial results and answer questions.
part 1：rehearsed, or even prerecorded
part 2：reflexive
indicators
indicator of how knowledge is dispersed throughout the firm
how much/ how often the chief executive spoke in contrast to other firm employees
could evaluate how knowledge was distributed among various executive teams and hypothesize how that distribution affected financials
spoke more presumably more knowledgeable/ tended to earn more
mismatched compensation strategies had lower firm value than those where talk time and compensation were aligned.
background
And as was the case with CEOs, CFOs who spoke more compared to their peers received higher compensation.
(i.e., chief executives who talked more but got paid less)
CFA
FIRST year of CEO
speak more
speak less
The language the management team uses can signal how it feels about its results—or how it expects the market to react to them.
Euphemisms
“lumpiness,” “headwinds,” or a “wait-and-see”
purpose: mislead
euphemistic earnings calls tend to significantly delay negative investor reaction
use euphemisms to soften their questions in the hope of getting those questions answered
language:decipher the personality of chief executives
personality traits are predictive of patterns of behavior
Big Five personality traits
conscientiousness, extroversion, agreeableness, neuroticism, and openness
agreeableness tended to use adverbs, fewer words per sentence, and vague quantifiers during the question-and-answer sessions.
Extroverted CEOs used fewer quantifiers, fewer words per sentence, and more so-called anxiety words, such as “worried” or “fearful.”
numerous connections between the characteristics of CEOs and the behaviors of the companies they lead
extroverted :lower cash flows and lower returns on assets.
conscientious : slower-growth companies
openness: greater focus on R&D
cues
contrastive words: such as but
the so-called contrastive word—has more influence on market reaction than what comes before.
provide favorable counter expectation information to reverse investors’ perception of seemingly unfavorable financial performance
who listen
buy-side consumers
do not hold the firm’s securities at the time they’re doing so
consultants, firm suppliers and partners, bankers, and media
interest is durable
Market participants
not only value public firm disclosures for their timeliness, but also as historical record for understanding the firm (3 years).
A scripted way to sound natural
training
Other strategies: more logistical than emotional
e.g: calls are most often held on Thursdays, with earnings released just before the market opens for the day.
the future of earnings calls
the words become more rehearsed
there are other ways to keep digging
Focusing research on intonation, awkward pauses, and other auditory details can provide even more information about an executive’s temperament.
firms will make video files available, which would permit analysis of things such as mannerisms or nervous tics
spontaneous word choices that offer insights on everything from executive character traits to the inner workings of a firm
time for an adjustment in your portfolio
neuroticism
openness
conscientiousness
about/ absolutely although/ and
always/never
although/and
all that staff/ almost
long sentence
reference to numbers
a lot/ a bit about/ absolutely
worried/fearful
besides/could
you know/ ah/ um
arguably/ as a hole
long sentence
about/absolutely- a lot of/ a load of - a lot/ a bit