“Stiff business headwinds and unchartered economic waters”: Use of Euphemisms in Earnings Conference Calls

This paper studies whether euphemisms obfuscate the content of earnings conference calls and cause investors to underreact. I argue that managers’ use of euphemisms can alleviate the impact of bad news and delay the market reaction to adverse information. Using a dictionary of corporate euphemisms, I find that their use by managers—but not by analysts—is negatively associated with both immediate and future abnormal returns, and their frequency moderates the negative market reaction to bad earnings news. Finally, stock underreaction is more pronounced on busy earnings announcement dates, when investor attention is distracted

Do Directors Have a Use-By Date? Examining the Impact of Board Tenure on Firm Performance

Corporate boards serve the dual important functions of monitoring and advising management. We examine whether corporate boards consisting of longer-serving independent directors are better able to fulfill these functions due to firm-specific knowledge accumulation, or whether director performance suffers due to declining effectiveness in monitoring managers and/or overall staleness of board capital (board value to shareholders). Using a broad sample of up to 3,800 firms over a 20-year period, our evidence suggests that board tenure is positively related to forward-looking measures of market value and stock returns, with the relationship reversing after about nine years on average. The detrimental effect of longer average board tenure on market value (after an initial period of positive effects) is stronger for high growth firms, which is consistent with the deterioration of the board members’ ability to perform their advisory function

Critical audit matters : possible market misinterpretation

The Public Company Accounting Oversight Board (PCAOB) recently expanded audit reports to disclose Critical Audit Matters (CAMs) and the audit procedures used to address them. We study the first wave of CAM disclosers from July 2019 to May 2020, which included large accelerated filers reporting on their 2019 fiscal year results. We examine whether market participants erroneously perceive firms with more extensive CAM disclosures to be riskier than firms with less extensive CAM disclosures. We find that firms with more extensive CAM disclosures are associated with increased perceived uncertainty: stock prices of these firms are significantly more volatile and analysts’ forecasts are significantly more dispersed than those of firms with less extensive CAM disclosures

A Practical Approach to Advanced Text Mining in Finance

The purpose of the study is to illustrate one application of unstructured data analysis in finance: the scoring of a text document based on its tone (sentiment) and specific events that are important for the end user. The methodology begins with the well-known practice of counting positive and negative words and progresses to illustrate the construction of relevant events. The authors show how the application of this methodology to the analysis of earnings conference call transcripts produces a signal that is incrementally additive to earnings surprises and the short-term returns around the earnings announcement. An interesting feature of the tone change extracted from the conference calls is that it has a relatively low correlation with both earnings surprises and the short-term return around the earnings announcement. This indicates how use of text mining and scoring of unstructured data can add information to investors beyond structured data

Margin Forecasts by Managers and Analysts.

In this article, the authors study qualitative margin forecasts made by managers in their earnings conference calls as well as forecast revisions of gross margins by financial analysts. Maintaining margins in cases when the costs of input factors rise indicates strength because the firm can pass these increased costs onto its customers. Increased margins when sales increase indicate strong market power by the firm or a better utilization of fixed resources. Decreasing margins when revenues increase typically indicate a strategy of capturing market share. Due to the recent difficulties in supply chains caused by the pandemic and then by inflation pressures, it became more important to study changes in margins forecasted by managers and analysts. The authors provide evidence that these forecasts can improve portfolio returns, especially when used in conjunction with forecast revisions of sales and earnings

When More Or Less Is Less: Managers\u27 Clichés

In their communications with the public, company managers disclose internal information, sometimes unwittingly. Prior studies have documented that the tone change in earnings conference calls can help predict future excess returns. Similarly, managers who use euphemisms on earnings calls to describe negative performance (think “headwinds”) essentially convey negative information to investors, and their stock is negatively affected. This study investigates another mechanism to identify management’s hedging (or obfuscation): the use of clichés. In this article, the authors identify the most frequently used clichés in earnings calls and examine whether investors react negatively to them. They find that managers use more clichés when performance is bad, and investors correctly react negatively to clichés, even after controlling for negative earnings news and the general tone of the earnings conference call. They also find that a hedge portfolio consisting of long positions in companies that used no clichés and short positions in companies that used at least four clichés earned an average of 2% per month and had a statistically significant intercept of 40 bps monthly after controlling for the five-factor Fama–French model

Board Tenure and Firm Performance

We view director tenure as an indicator of a firm\u27s stability. Longer board tenure indicates that shareholders are satisfied with their director appointments, that the board has the relevant mix of capital, that it is effective at monitoring and advising management, and that the firm is unlikely to face operational and strategic problems that require drastic changes to its board. Using a broad sample of up to 3800 firms over a 20-year period, we show that firms with longer board tenure have higher future abnormal returns. Our evidence suggests that investors misprice board tenure: longer board tenure is associated with higher market valuations but not with higher expected returns as measured by analysts\u27 target prices

A New Uncertainty Measure – CAM

In contrast to past auditor opinions, which were largely unqualified and uniformly written, a new disclosure requirement expands auditors’ opinions to include a description of Critical Audit Matters (“CAMs”) and the audit steps necessary to form an opinion about them. The expanded disclosure provides substantially more information about the areas of financial reporting that auditors consider most uncertain. Using a comprehensive sample of initial CAM disclosures in the 10-K filings for the period of August 2019–May 2020, we find that a larger number of CAMs, a greater number of required auditing procedures, and more wordy and extensive CAM discussions are negatively associated with stock returns immediately following the 10-K filings. We also document significantly more negative analyst earnings revisions for firms whose auditors report more CAMs and provide more verbose CAM disclosures

Order Backlog in Earnings Conference Calls.

Focusing on quarterly earnings conference call transcripts, we provide evidence that order backlog discussions are positively priced by investors. Pricing appears to be efficient whether these discussions are accompanied by quantitative support or are solely qualitative. We find these disclosures to have stronger pricing effects for growth firms and firms with weaker information environments. Our study contributes to the body of order backlog research by incorporating more timely disclosures as well as by incorporating qualitative disclosures

Orders Backlog in Earnings Conference Calls

Firm disclosure of order backlog (OB) is considered important to assess future sales and profits. The extant literature on OB has generally documented positive associations between increases in OB and market returns. These associations were based on annual disclosures of backlog in 10-K filings, and could have been caused by other simultaneous disclosures that were also correlated with order backlog. To focus on the direct effects of backlog on market participants, we use references to OB in earnings conference call transcripts. We find incremental market reactions to OB after controlling for earnings surprise and other information communicated during the conference call. Our findings also reveal that OB disclosures are more relevant when they are supported by numbers and when firms derive a material amount of their demand from OB