Framing

Abstract

We examine the impact framing of information has on the ability of market participants to process information in an earnings conference call. Following conference calls’ use of greater linguistic framing, uncertainty is higher. We show that firms experience up to three months of higher total and idiosyncratic risk, greater trading activity, and lower excess returns. Framing impacts financial analysts as well, as we observe significantly larger analyst forecast errors during the subsequent quarter. Forecast characteristics such as the size of revisions, forecast dispersion, and analyst disagreement also increase with the use of framing. Consistent across our results, the impact of framing is significantly larger among firms that underperform earnings expectations and thus have an incentive to obfuscate negative information. Overall, our evidence is consistent with linguistic framing reducing the ability of financial markets to effectively evaluate the information of an earnings conference call.

Keywords: Information Processing, Conference Calls, Natural Language Processing, Financial Markets

JEL Classification: G00, G10, G12, G14