When Managers Change Their Tone, Analysts and Investors Change Their Tune
75 Pages Posted: 3 Feb 2015 Last revised: 2 Jan 2018
Date Written: December 15, 2017
An increase in the negativity of managerial word choice (managerial tone) on conference calls strongly predicts lower future earnings and greater uncertainty. However, a decrease in negativity only weakly predicts the opposite. To isolate managerial tone’s explanatory power, we control for negativity changes in the earnings press release and analysts’ questions. In industries where firms provide earnings guidance, negativity changes are particularly informative. How effectively do analysts and investors process this information? They extract value-relevant information from negativity changes, but incompletely. A monthly calendar-time strategy that exploits the incomplete adjustment of stock prices to negativity changes generates abnormal returns.
Keywords: Analysts, earnings conference calls, information transmission, managerial tone, negative words, tone changes, price drift, textual analysis
JEL Classification: G14, G30
Suggested Citation: Suggested Citation