Contextualization of Numbers in Earnings Conference Calls

Abstract

Prior research generally finds that using numbers in financial disclosure is beneficial. However, numbers can also be strategically proffered due to their perceived precision and informativeness. We hypothesize that firms use undercontextualized numbers to create a false impression of certainty and transparency. We find that the use of undercontextualized numbers in earnings conference calls is associated with short-term benefits but negative longer-term consequences. Specifically, undercontextualization is associated with a short-term positive market return, positive analysts’ forecast revisions, and more positive analysts’ tone on the call. Furthermore, undercontextualization is associated with a longer-term negative market return, a decrease in year-over-year earnings, and a higher incidence of restatements. In additional analyses, we find that undercontextualization appears to be intentional as it is associated with conference call casting and insider trading. Given the uniqueness of our undercontextualization measure, we also document its association with analyst scrutiny and other proxies for strategic call behavior.

Keywords: textual analysis, strategic disclosure, conference calls, analysts’ forecasts, insider trading, restatements

JEL Classification: G14, M40, M41, M48