Can Investors Detect Managers’ Lack of Spontaneity? Adherence to Pre-determined Scripts during Earnings Conference Calls

Abstract

This paper examines whether market participants infer negative information about future unexpected firm performance when managers adhere to pre-determined scripts when responding to questions during earnings conference calls. I argue that managers respond to questions from prepared scripts to avoid the disclosure of bad news. Using a measure of the adherence to pre-determined language, I provide evidence that a lack of spontaneity is negatively associated with the market reaction to the call and with the abnormal returns in the subsequent quarter. I further find that analysts downgrade their forecasts following these calls. I also provide evidence that adherence to pre-determined language is negatively associated with future unexpected firm accounting performance, supporting investors’ negative response to it. Finally, I find that bid-ask spreads increase and firms are less likely to guide future earnings when managers adhere to the pre-determined language of a script, suggesting that firms provide less information, not more, during these calls.

Keywords: Conference calls, spontaneity, scripting, textual analysis, firm performance

JEL Classification: G14, M40, M41