Executives' Blaming External Factors and Market Reactions: Evidence from Earnings Conference Calls

Abstract

We investigate how market participants react when corporate executives strategically blame the economy or industries for poor firm performance. In the quarters subsequent to earnings conference calls, we find that the "blame sentences," which capture executives' blaming tactics, predict negative and non-reverting abnormal returns, negative earnings surprises, and analyst recommendation downgrades. These blaming tactics also reduce the sensitivity of executives' turnover to their performance. Our findings imply that executives strategically inject the negative information about future cash flows into blame sentences. Market participants need to combine distinct categories of information (firm-specific vs. economy-wide) to understand the implications of blame sentences, which consumes more cognitive resources and delays their reactions to the blame sentences.

Keywords: Market underreaction, Corporate executives, Earnings conference calls, External factors, Textual analysis