How to Listen for the Hidden Data in Earnings Calls

The team categorized the personalities of 4,700 CEOs using the traits that make up the “Big Five,” a widely accepted framework for classifying personality characteristics: conscientiousness, extroversion, agreeableness, neuroticism, and openness to experience. To do so, they searched for 33 linguistic features that they associated with these various personality types. For example, CEOs who were agreeable tended to use adverbs, fewer words per sentence, and vague quantifiers during the question-and-answer sessions. Extroverted CEOs, on the other hand, used fewer quantifiers, fewer words per sentence, and more so-called anxiety words, such as “worried” or “fearful.”

The researchers used their findings about executive personality traits to assess how those traits are associated with firm performance. Their findings suggest numerous connections between the characteristics of CEOs and the behaviors of the companies they lead. For example, the companies of CEOs who have extroverted personalities, as observed in the words used in the transcripts, were more likely to have lower cash flows and lower returns on assets. Top executives deemed to be more conscientious tended to run slower-growth companies, while those whose dominant personality trait was openness had companies with a greater focus on R&D.

In addition to providing insight into executives and firms, the language of conference calls can provide cues to help listeners pick up on important information. Research by Rutgers’s Dan Palmon and Rutgers PhD candidate Ke Xu, along with Bentley University’s Ari Yezegel, looked at disclosures before and after the word “but” during question-and-answer sessions, and their respective impact on stock prices. The study finds that what comes after “but”—the so-called contrastive word—has more influence on market reaction than what comes before.

The use of contrastive words is a way to provide unexpected bits of information during the latter portion of the call to address analyst concerns. Ultimately, the information is used in a corrective manner to clarify unfavorable revelations, according to the findings. “The use of contrastive words can provide favorable counter expectation information to reverse investors’ perception of seemingly unfavorable financial performance,” the researchers write.

Taking advantage of easy access

Mining data from the transcripts of earnings calls wasn’t always so simple. Twenty years ago, transcripts weren’t as widely available as they are today. But in 2000, the US Securities and Exchange Commission established Reg FD, or Regulation Fair Disclosure, which forbids publicly traded companies from sharing “material nonpublic” information with analysts and investors without making it public at the same time. Best practices dictate that compliant firms make earnings calls available to the public via transcript or audio.

As a result, there has been a growing interest in these easily accessible quarterly disclosures—and not just from those who have equity in the companies being discussed. Research from Columbia University’s Anne Heinrichs, Harvard doctoral candidate Jihwon Park, and Harvard’s Eugene Soltes indicates that in addition to sell-side analysts and the companies’ current investors, institutional investors without any position in the firm are often listening—in fact, on average, half of buy-side consumers listening to or reading the transcript of an earnings call do not hold the firm’s securities at the time they’re doing so. “We find that much of institutional buy-side consumption [of earnings calls] actually arises from non-holders who may consider [making] an investment or who use the call to fulfill other informational needs,” Heinrichs, Park, and Soltes write.

There is also a broader interest in firm-initiated news, according to the researchers, who find that consultants, firm suppliers and partners, bankers, and media all take an interest in these calls. And that interest is durable: of the earnings-call audio or transcript requests that the researchers studied, 82,000—about 7 percent of the total—were for calls that were three years old or older. “Market participants not only value public firm disclosures for their timeliness,” the researchers write, “but also as historical record for understanding the firm.”

A scripted way to sound natural

Many executives are highly aware of the importance of what they say during earnings calls, and they can spend weeks getting ready for them—from rehearsing answers to strategizing about the order in which analysts are called upon for the question-and-answer portion. Others can be reluctant to set aside significant time to prepare for earnings calls, “and a few come into coaching sessions kicking and screaming,” says Jeff Leshay, a Chicago-based executive communications coach. Once they understand the value of prep work, however, “they learn to turn even the most challenging earnings-call questions into opportunities to build their brand.”

Leshay helps companies communicate using engaging anecdotes around the information disclosed during their earnings calls. He counsels clients on how to speak conversationally and with a genuine level of enthusiasm that helps the remarks feel unscripted—for instance, by speaking while standing and smiling, which can create an authoritative and enthusiastic tone that translates well over the phone. “They have to appeal to analysts on an emotional level,” he says, while also providing the data and details those analysts need to build their models.

Other strategies are more logistical than emotional. The National Investor Relations Institute (NIRI), a professional association for investment-relations professionals, helps run data on best practices for holding calls. For example, calls are most often held on Thursdays, with earnings released just before the market opens for the day.

Seeking out selective access

Companies have responded to the increased interest in earnings calls. In 2016, 97 percent of public companies conducted calls, compared to 80 percent in 1996, according to a 2016 NIRI research report. There’s also been an uptick in CEO attendance: Minnis and his coauthors find that 93 percent of chief executives attended calls in 2007, up from 86 percent in 2003, and that the portion of the talking done by the CEO went up as well.

But the competition for special access to public companies is changing, says Minnis. While earnings calls must be available to the public, investors are flocking to conferences hosted by big financial institutions, which give investors a closed venue for communication. “At conferences, executives can provide pieces of the mosaic about the company that an expert investor might find informative,” Minnis says, though he adds that technically, Reg FD doesn’t allow any extra information to be released.