Analyst Conflict of Interest and Earnings Conference Call Informativeness
Posted: 31 Aug 2018
Date Written: July 17, 2018
We examine the informativeness of dialogues between managers and analysts during earnings conference calls. We distinguish between favored and disfavored analysts who face different conflict of interest levels when dealing with management. Favored analysts curry favor with management by providing favorable recommendations and achievable earnings forecasts. While market participants may dismiss dialogues with favored analysts as biased and uninformative, it is also possible that favored analysts enjoy more private access to management leading to more informative dialogues. Using intra-day absolute stock price reactions around specific analyst-manager dialogues to proxy for informativeness, we find that manager dialogues with disfavored analysts are more informative. Analysis of dialogue characteristics reveals that disfavored analysts elicit information from management by engaging in longer dialogues with more back-and-forth iterations relative to favored analysts. Stock prices directionally respond to both the analyst’s linguistic tone and the manager’s voice pitch. While favored analysts exhibit a more positive tone compared to disfavored analysts, managers reduce their voice pitch to signal dominance regardless of how favored the analyst is. We find no evidence that disfavored (favored) analysts systematically drive stock prices down (up). Overall, the capital market effects of earnings conference calls are far more nuanced than previously documented.
Keywords: Conference Calls, Financial Analysts, Favored Analysts, Price Formation, Market Microstructure, Conflict of Interest
JEL Classification: M41
Suggested Citation: Suggested Citation