Playing Favorites: How Firms Prevent the Revelation of Bad News

74 Pages Posted: 13 Aug 2014 Last revised: 24 Mar 2019

See all articles by Lauren Cohen

Lauren Cohen

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 20, 2019

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: information, strategic release, firms, asset pricing, conference calls

JEL Classification: G12, G14, G02, M41

Suggested Citation

Cohen, Lauren and Lou, Dong and Malloy, Christopher J., Playing Favorites: How Firms Prevent the Revelation of Bad News (March 20, 2019). Available at SSRN: https://ssrn.com/abstract=2479542 or http://dx.doi.org/10.2139/ssrn.2479542

Lauren Cohen (Contact Author)

Harvard University - Business School (HBS) ( email )

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HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

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Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
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HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christopher J. Malloy

Harvard Business School ( email )

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617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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