An Investigation Of Analysts’ Praise Of Management During Earnings Conference Calls

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An Investigation Of Analysts’ Praise Of Management During Earnings Conference Calls

Jonathan A. Milian

Florida International University (FIU)

Antoinette L. Smith

Florida International University (FIU)

April 2, 2015

Forthcoming in the Journal of Behavioral Finance


Through the textual analysis of a large sample of earnings conference calls, we find that analysts praise management on over half of earnings conference calls by saying complimentary phrases such as “congratulations on the great quarter.” Our results show that analysts’ complimentary phrases reflect the nature of the information released at the earnings announcement. We find that the amount of praise by analysts on an earnings conference call is strongly associated with the earnings surprise and to a greater extent the earnings announcement stock return. We also find that there is value to investors in tracking analysts’ flattery of management during earnings conference calls as it predicts abnormal stock returns over the following quarter. Our findings, which are incremental to prior research on the tone of earnings conference calls, highlight a previously ignored aspect of analyst feedback.

An Investigation Of Analysts’ Praise Of Management During Earnings Conference Calls – Introduction

From the stock price reaction to a firm’s earnings announcement, capital market participants receive immediate evaluation of the firm’s earnings results and managers receive immediate feedback on firm performance. Earnings conference calls, which are commonly held shortly after firms announce their earnings results, provide the opportunity for immediate verbal feedback from analysts who follow the firm. Theoretical research suggests that managers can benefit both from the feedback in stock price reactions (Dye and Sridhar 2002) and from analysts’ feedback (Langberg and Sivaramakrishnan 2010). While feedback from analysts is naturally assumed to take the form of revisions in analysts’ forecasts, anecdotal evidence and the casual reading of earnings conference call transcripts suggests that analysts also provide feedback to managers in the form of verbal praise during the question and answer portion of the earnings conference call by using phrases such as “great quarter,” “good job,” and “congratulations.”1 This paper documents the prevalence of complimentary phrases by analysts during earnings conference calls and determines the extent to which this praise serves as both an indicator of current performance and a predictor of future performance.

Prior research has not directly examined the praise provided by analysts during earnings conference calls. Documenting the prevalence of this practice is interesting and important. Prior studies indicate that subtle measures of earnings conference call sentiment (e.g., tone) contain significant information (i.e., correlates with the earnings announcement news and predicts future returns, analyst forecast revisions, analyst target price revisions, and analyst recommendations).3 These studies use the frequency of positive and negative words in earnings conference call transcripts to measure tone, typically based on the positive and negative word lists of Loughran and McDonald (2011).4 For example, Price, Doran, Peterson, and Bliss (2012) find that the tone of an earnings conference call has significant explanatory power regarding the concurrent abnormal stock return and predictive power regarding the post-announcement abnormal stock return. Brockman, Li, and Price (2015) extend this finding by separating the tone of management and the tone of the analysts. They find that while the tone of both parties is informative, analysts’ tone is relatively more informative. We conjecture that if analysts’ praise of management is prevalent on earnings conference calls, then quantifying this praise can more directly capture the sentiment of analysts and the feedback received by management.

Even if analysts’ praise of management is common on earnings conference calls, it is not necessarily useful information. Analysts may use compliments to curry favor with management rather than as a means to reveal their unbiased assessment of firm performance. Prior research suggests that more favorable analysts have better access to information (e.g., Chen and Matsumoto 2006; Ke and Yu 2006) and are more likely to be called on during earnings conference calls (Mayew 2008; Cohen, Lou, and Malloy 2014). Thus, if compliments on earnings conference calls are largely blatant attempts by analysts to ingratiate themselves with management, then a more subtle measure of analysts’ sentiment, such as tone, may better reflect analysts’ true sentiment. However, if analysts are mainly objective in their provision of compliments, then we should expect a strong association between compliments and firm performance. Therefore, we empirically investigate whether there is any value in tracking the amount of compliments by analysts on earnings conference calls.

Earnings Conference Calls

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