Lawyers in the C-Suite: Balancing Strategic Narrative and Legal Risk in Earnings Calls

Abstract

This study examines whether the inclusion of General Counsels (GCs) in top management influences the tone and cautiousness of language in earnings conference calls. We find that GCs play a dual role in corporate communication. Their inclusion in top management is associated with higher net positive sentiment in the Management Discussion (MD) section, as GCs guide optimistic messaging to align with strategic objectives. Conversely, in the unscripted Q&A session, GCs encourage a more cautious approach, characterized by increased use of hedging language and "no answer" responses, to mitigate legal risks during analyst-driven exchanges. We also find that a higher proportion of performance-based compensation strengthens GCs' influence on optimistic messaging in the MD section by aligning their incentives with broader executive priorities. Similarly, GCs are more likely to guide an optimistic narrative in the MD section when closely aligned with the CEO. Furthermore, longer GC tenure enhances cautious behavior in the Q&A session. Moreover, GCs in top management guide more cautious language in the Q&A session for firms facing high ex-ante legal risks. These findings provide new insights into how GCs balance strategic communication with legal risk management in earnings calls.

Keywords: Earnings Conference Calls, General Counsels, Linguistic Tone, Textual Analysis

JEL Classification: G34, M41, K22