The Price of Silence: When No One Asks Questions During Conference Calls
University of Texas at Austin – Red McCombs School of Business
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Tilburg University – Tilburg School of Economics and Management
June 12, 2014
We document economically significant indirect costs of providing conference calls — increase in information asymmetry and more negative immediate market reaction — when managers fail to elicit questions during the calls’ question-and-answer (Q&A) session. We establish this result by focusing on earnings calls where managers fetch either zero questions or “too few” questions when they open the floor for questions. We extend the literature on conference calls as an important corporate communication medium by examining hereto unexamined costs, and propose remedies for firms to avoid such indirect costs of corporate communication.
The Price of Silence: When No One Asks Questions During Conference Calls – Introduction
Open earnings calls, earnings-related conference calls where market participants can listen in and ask questions, are fast becoming a dominant channel of interactive communication between managers and the investment community. The latest National Investor Relations Institute survey shows that 98% of firms surveyed hold conference calls (Allen (2011)). Extant research finds that investors and analysts benefit from the information revealed during earnings calls and that even the tone and vocal cues of managers move the market (Frankel, Johnson, and Skinner (1999), Bowen, Davis, Matsumoto (2002), Mayew, Sharp, and Ventakachalam (2013)). More recent research reveals that the question and answer sessions of earnings calls convey incremental information to investors (e.g., Hollander, Pronk, and Roelofsen (2010), Matsumoto, Pronk, and Roelofsen (2011)), and offer more transparent disclosure than the scripted presentation session (Kimbrough and Louis (2011)).
While the benefits of open calls are widely noted, the potential costs of holding conference calls, other than the direct costs of managerial time and monetary expenses involved in the preparation and presentation of conference calls, are not well-understood.1 We investigate the indirect costs of hosting open-access conference calls arising from a lack of interaction between managers and analysts during the Q&A sessions of conference calls. This investigation answers calls from academics for more research on the interactive feature of conference calls as a dominant corporate disclosure channel (Skinner (2003), Mayew (2012)).
Drawing on prior research, we argue that the absence or, more generally, lack of questions leads to an increase in information asymmetry among investors as it makes information acquisition more costly, particularly for uninformed smaller investors who are typically more resource constrained and have less direct access to management (Diamond and Verrecchia (1991), Brennan and Subrahmanyam (1995)). Recent theoretical and empirical research establishes that such increase in information asymmetry leads to a fall in share price as expected returns become more sensitive to liquidity risk (Easley and O’Hara (2004), Kelly and Ljungqvist (2012), Balakrishnan, Billings, Kelly, and Ljungqvist (2014), Levi and Zhang (2014)). If investors perceive the lack of interaction as a lack of buying interest in a stock and such perception leads to more selling than buying (i.e., increasing liquidity risk), price will also drop even in the absence of an information asymmetry change.
Thus, information asymmetry will increase and price will drop when there is a lack of questions, or, at the extreme, a total absence of questions during a conference call’s Q&A session. However, it is possible that managers are comprehensive in the presentation section of the conference call so that no questions remain unanswered. In this case information asymmetry should not change. Further, if the absence of questions is an indication that investors have lost interest in the stock, then there should be no trade and price should not change.
Understanding the indirect costs of hosting earnings calls, as captured by an increase in information asymmetry and adverse short-window stock price reactions, is important for several reasons. First, a significant amount of trading is concentrated around important public information release events such as earnings calls (Bushee, Matsumoto, and Miller (2003)). Second, managers are known to be highly concerned about short-term market reactions, especially to earnings announcements and the associated earnings calls, and would sometimes resort to non-value maximizing real actions in order to avoid a short-term negative price impact (Graham, Harvey, and Rajgopal (2005)). A better understanding of the potential costs can inform managers in improving their investor relations program to mitigate such costs. Third, we add to the academic literature on earnings calls by providing evidence on the potential costs of conference calls. Lastly, we believe the absence of questions in the Q&A session is an interesting empirical phenomenon in itself.
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