Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity during Conference Calls?

Abstract

This paper examines whether analysts and investors efficiently incorporate the informational signals from managerial linguistic complexity (e.g. Fog) into their forecasts and trading decisions. We predict that managerial linguistic complexity on a conference call provides a signal of the manager’s private information through their willingness to engage with analyst questions. Consistent with this engagement mechanism, we show that linguistic complexity evolves over the course of the call, with informative (uninformative) calls exhibiting more (less) informative technical disclosure as the call progress. We find that informative (obfuscatory) managerial Fog provides a positive (negative) signal of future earnings growth. We also find that analysts efficiently revise their forecasts to both positive and negative signals, whereas investors only correctly interpret obfuscation during the call; there is a delayed price reaction to informative Fog. However, when buy-side investors ask questions during a call, we find an efficient price reaction to informative Fog. Our findings highlight an important benefit of two-way interactive disclosures and underline the importance of call participation for efficiently incorporating linguistic signals of managers’ private information.

Keywords: conference call; linguistic complexity; two-way engagement; informative technical disclosure; analyst forecasts; market reaction.

JEL Classification: D82, G14, G18, M41, M48