Buy Side Analysts’ Participation On Public Earnings Conference Calls
Arizona State University (ASU) – School of Accountancy
Texas A&M University – Department of Accounting
Rensselaer Polytechnic Institute (RPI) – Department of Finance and Accounting
February 12, 2016
Using a sample of 28,000 quarterly earnings conference call transcripts from 2008 to 2013, we examine the frequency and nature of buy side analysts’ participation in the Q&A session of corporate earnings conference calls. We find that buy-side analysts appear on approximately 15% of all conference calls, with analysts employed by hedge funds (mutual funds) representing 46% (22%) of buy-side analyst appearances. Buy-side analysts are more likely to appear on conference calls of firms followed by fewer sell-side analysts, with higher bid-ask spreads, and not in the S&P 1500, suggesting that buy-side analysts are more likely to ask questions on conference calls when uncertainty about the firm is high. Management gives buy-side analysts priority by allowing them to ask the first question on a disproportionate number of calls. We also examine the length and tone of analysts’ interactions with management, and find that relative to sell-side analysts, buy-side analysts’ interactions are shorter and their exchanges with management exhibit less favorable tone. Finally, we document that changes in bid-ask spreads following conference calls are positively associated with buy-side participation on the call and that institutional holdings increase (decrease) when buy-side tone is relatively favorable (unfavorable). Our findings add to a growing literature on buy-side analysts by documenting their use of quarterly earnings conference calls.
Buy Side Analysts’ Participation On Public Earnings Conference Calls – Introduction
In spite of their importance in the capital markets, buy side analysts are not well understood because their research is not disseminated to the public and therefore not subject to examination on a large scale. Recent studies have attempted to overcome these hurdles in various ways, including analyzing small samples of proprietary buy-side data (Groysberg et al., 2008; Groysberg et al., 2015; Rebello and Wei, 2012), administering surveys to buy-side analysts (Brown et al., 2015b), and obtaining data through online social networks of buy-side analysts (Crawford et al., 2014). We further our understanding of buy-side analysts by analyzing their participation in a large sample of public earnings conference calls. Specifically, we perform a detailed analysis of conference call transcripts to address several related research questions. First, how often do buy-side analysts participate in the Q&A portion of public earnings conference calls, both in general and relative to sell-side analysts? Second, what are the conditions associated with buy-side analysts’ participation on public earnings conference calls? Third, does company management prioritize buy-side analysts on earnings conference calls? Fourth, how does the tone of buy-side analysts’ interactions with management compare with the tone of sell side analysts’ interactions during conference calls? Fifth, how long are the exchanges on conference calls between buy-side analysts and company management relative to the exchanges between sell-side analysts’ and company management? Finally, what is the impact of buy-side analyst conference call participation on subsequent excess equity returns, bid-ask spreads, and changes in institutional holdings?
Conference calls transcripts are a useful setting for improving our understanding of buy side analysts for several reasons. First, as a practical matter, because we are able to obtain 28,503 conference call transcripts for 1,447 firms, we can examine one element of buy side analysts’ activity (participation on public earnings conference calls) on a large scale and across a broad range of firms. To date, studies of this scope have been rare in the literature on buy-side analysts. Second, public earnings conference calls are a particularly important news event, not just because of the information disseminated in the earnings announcement itself, but also because the accompanying conference call provides buy side analysts with the opportunity to interact directly with company management as they update their assessment of the firm. Third, because sell-side analysts also participate on public earnings conference calls, this setting allows us to compare buy-side analysts to sell-side analysts on several interesting dimensions.
We collect earnings conference call transcripts from 2008 to 2013 through Capital IQ and employ specialized algorithms to analyze text transcribed from speech during the Q&A portion of each call. We introduce a comprehensive taxonomy to identify the individual asking each question on the conference call as either a buy side analyst, a sell-side analyst, or a member of the media. Our taxonomy identifies 1,114 institutions and allows us to further distinguish between buy-side analysts employed by hedge funds, mutual funds, or registered investment advisors (RIAs), and to distinguish between affiliated sell-side analysts (whose employer offers investment banking or advisory services), unaffiliated sell-side analysts (broker-dealers), and independent sell-side analysts. In addition, we measure the length and tone of each conference call participant’s exchanges with management, shedding further light on the interactions participating analysts have with management.
We find that while sell-side analysts are the most regular conference call participant, buy side analysts participate on about 15% of all earnings conference calls in our sample. Among buy-side analysts, those employed by hedge funds are the most frequent conference call participant, appearing on about 8% of all conference calls, with analysts employed by mutual funds and registered investment advisors (RIAs) each appearing on about 4% of all calls. At least one sell-side analyst appears on almost every conference call, with affiliated sell-side analysts participating more frequently (93% of all calls) than unaffiliated and independent analysts (34% and 21% of all conference calls, respectively).
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