Do Sophisticated Investors Interpret Earnings Conference Call Tone Differently than Investors at Large? Evidence from Short Sales

45 Pages Posted: 19 Sep 2012 Last revised: 19 Mar 2015

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Jared DeLisle

Utah State University

S. McKay Price

Lehigh University - Perella Department of Finance

Date Written: January 31, 2015

Abstract

Recent research finds that investors, broadly defined, react to the linguistic tone of quarterly earnings conference calls; there is a positive relation between firms' stock returns and call tone (a measure of “sentiment” related word tabulations). However, this type of soft information can be subtle, context-specific, and difficult to interpret. Moreover, the literature suggests cross-sectional variation in information processing skills among investors. Thus, we test whether sophisticated investors interpret earnings conference call tone differently than investors at large by examining short selling activity and its relation to earnings conference call tone. We find that short sellers target firms with simultaneous high earnings surprise and abnormally high management tone. The combination of positive earnings surprise and unusually positive tone strengthens short sellers' return predictability. This result indicates that short sellers interpret revealed “inflated” call language by managers more completely than naïve investors. The incomplete stock price reaction by naïve investors due to the lack of reliability they place on this soft information results in overpricing of the stock. However, it also suggests that managers are unable to maintain prolonged overvaluation of their stock by striking an overly optimistic posture in the interactive conference call disclosure forum since short sellers' trades provide additional price discovery.

Keywords: Earnings conference calls; Disclosure; Linguistic analysis; Information processing; Short selling

JEL Classification: D80, D82, D83, G10, G12, G14, G30

Suggested Citation

Blau, Benjamin M. and DeLisle, Jared and Price, S. McKay, Do Sophisticated Investors Interpret Earnings Conference Call Tone Differently than Investors at Large? Evidence from Short Sales (January 31, 2015). Journal of Corporate Finance, Vol. 31, 203-219, 2015. Available at SSRN: https://ssrn.com/abstract=2148705 or http://dx.doi.org/10.2139/ssrn.2148705

Benjamin M. Blau

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Jared DeLisle (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

S. McKay Price

Lehigh University - Perella Department of Finance ( email )

621 Taylor Street
Bethlehem, PA 18015
United States
610-758-4787 (Phone)

HOME PAGE: http://www.mckayprice.com

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
250
Abstract Views
1,423
rank
128,964
PlumX Metrics