Working Paper: NBER ID: w19429
Authors: Lauren Cohen; Dong Lou; Christopher Malloy
Abstract: We explore a subtle but important mechanism through which firms can control information flow to the markets. We find that firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 149 basis points per month, or almost 18 percent per year. We find similar evidence in an international sample of earnings call transcripts from the UK, Canada, France, and Japan. Firms with higher discretionary accruals, firms that barely meet/exceed earnings expectations, and firms (and their executives) that are about to issue equity, sell shares, and exercise options, are all significantly more likely to cast their earnings calls.
Keywords: Earnings Conference Calls; Information Disclosure; Analyst Recommendations
JEL Codes: G0; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| casting behavior (Y60) | negative future returns (G12) |
| calling on bullish analysts (G24) | negative future earnings surprises (D80) |
| casting behavior (Y60) | future earnings announcements underperformance (G14) |
| casting behavior (Y60) | negative market reactions (G41) |
| higher discretionary accruals (G39) | casting behavior (Y60) |
| meeting or exceeding earnings expectations (G14) | casting behavior (Y60) |
| executives planning to sell shares (G34) | casting behavior (Y60) |
| casting behavior (Y60) | hidden negative information revealed over time (D82) |
| casting behavior (Y60) | negative future returns in international sample (G15) |