The Hidden Messages in Corporate Conference Calls

Earnings-report presentations supposedly present hard numbers, but listening for the right words can be much more revealing.

Professional poker players pay close attention to discover "tells"—that is, giveaway signals that an opponent has a strong or weak hand. David Hayano, an anthropology professor who wrote a classic book on poker, says that classic amateur tells include smiling, touching one's nose, adjusting one's posture, and being chattier. And if you don't know how to look for tells, then Paul Newman has some advice: "If you're playing a poker game and you look around the table and and can't tell who the sucker is, it's you."

But tells might not only carry big stakes for poker players. A new NBER paper looks at how financial analysts look for "tells" during earnings conference calls with S&P 500 companies. During these calls, upper management (such as CEO, CFO, or chairpersons) brief investors and analysts on earnings and information that's relevant to the industry. Usually these calls begin with presentation information and end with a question and answer portion. For most companies, earnings calls are held for quarterly and yearly results.

The researchers looked at earnings call transcripts over eight years, from 2004 to 2012, to look at how much concrete information was revealed on the call and what kind of unquantifiable information might also be gathered from the language used on the call. They found one major "tell": that excessive use of negative words, what the researchers call "tone surprise," can predict a company's future earnings.

Drawing on a list of over 2,000 words already proven to be negative, they found that a manager's relatively gloomy diction throughout the call was associated with smaller future earnings. In the data, the researchers found four additional speech patterns that might indicate bad times ahead: inconsistency between positive and negative word use, frequent use of words to indicate change, a large number of words per phrase, and wrong verb tenses.

Moreover, the researchers found that even though these tells weren't as concrete as the earnings numbers themselves, analysts listening to the call were still able to act on this somewhat subliminal information. In other words, analysts who heard promising earnings numbers presented with a subtext of negativity tended to have more conservative forecasts than when that subtext wasn't detectable.

Another finding was that seasoned analysts were more likely to pick up on these cues than novices. Using the Institutional Brokers' Estimate System, the researchers matched an investor's experience to their forecasts to look at how analysts with different experience levels responded to calls with "tone surprise." The researchers write: "Experienced analysts appear to recognize that tone surprises predict future earnings, and they adjust their forecasts appropriately. Inexperienced analysts, however, have a less accurate and less nuanced response: They overreact to abnormally negative tone in presentations, but under-react to abnormal negativity in responses to analysts’ questions."

Either way, this study is proof that paying attention during conference calls pays off.