Len Boselovic’s Heard off the Street: Sensing scripted calls, investors crave spontaneity
January 18, 2016 12:00 AM
Associate Press file photo
By Len Boselovic / Pittsburgh Post-Gazette
Earnings season is once again upon us, bringing with it earnings calls featuring CEOs touting their latest achievements and analysts, seeking greater access to the kingdom, spouting “good quarter guys.”
The quarterly pas de deux fascinates academicians, who studiously analyze the events.
They have discovered that analysts with more favorable ratings on the company hosting the call are more likely to get the opportunity to ask questions. They’ve found that investors respond negatively when management refuses to answer questions. They’ve analyzed stock price movements during the calls and concluded that investors get incrementally more information during the question-and-answer session than they do during the formal presentation.
They’ve even scrutinized how investors respond to the emotional state of executives on the calls.
Florida State University accounting professor Joshua Lee is among the latest to advance this body of knowledge. His interest in the topic was kindled as a Ph.D. candidate at Washington University in St. Louis when a colleague opined about how scripted the calls are and how little information they convey.
That led Mr. Lee to examine whether management, in addition to scripting the formal presentation, also scripts responses to questions they expect to get on the calls and how investors respond to canned answers.
What he discovered is that investors don’t like it.
Companies that relied the most heavily on scripted answers had market-adjusted returns of -0.2 percent over the next two days while firms that relied on it the least experienced market-adjusted returns of 0.4 percent over the same period, according to Mr. Lee’s study, recently published in The Accounting Review, a journal of the American Accounting Association.
Mr. Lee also found that analysts revised their forecast downward following calls where the answers were heavily scripted.
There are valid reasons for companies to develop answers in advance.
Mr. Lee said they may want to avoid disclosing negative news because it could hurt the stock price, a major determinant of their pay. They may harbor hope that something will happen that will make the bad news go away so that there’s nothing to report, he said. Faced with the options of revealing information they don’t want to reveal or angering analysts by refusing to answer questions, they may dance around the topic by relying on a script, Mr. Lee said.
He looked at more than 40,000 conference calls conducted by more than 2,800 firms between 2002 and 2011, analyzing whether the speech pattern of executives differed significantly between their formal presentation, which he assumed was scripted, and the Q&A session. He relied on widely used methods used to determine, among other things, whether James Madison or Alexander Hamilton wrote certain Federalist Papers where the author was not identified.
If the executive’s speech pattern was significantly different from what he used during the formal presentation, Mr. Lee determined he wasn’t reading scripted answers.
He said that although investors don’t perform the sophisticated analysis he did, they still pick up on when they are being fed canned answers. So before preparing a script and running the CEO through a dry run of the call, companies should realize their efforts are futile.
“If you’re going to put the time and effort into [scripting answers], just understand that investors aren’t stupid,” said Mr. Lee, whose paper concludes “investors discern the lack of spontaneity and view it as a negative signal.”
Then again, Cliffs Natural Resources CEO Lourenco Goncalves’ debut conference call performance in November 2014 illustrates the trouble with spontaneity.
The natural resource company’s shares were trading for about $11 at the time. Wells Fargo analyst Stan Dubinsky predicted they were going to $4.
So here’s what Mr. Goncalves had to say when Downer Dubinsky had the temerity to ask a question on the call: “Stan, I appreciate you saying thank you for taking your question. But I’m not going to answer your question because you already know everything about my company. You have a $4 price target.”
Mr. Dubinsky wasn’t stupid, unless you fault him for not setting the target at $1, near where Cliffs shares are currently languishing.
To report inappropriate comments, abuse and/or repeat offenders, please send an email to
email@example.com and include a link to the article and a copy of the comment. Your report will be reviewed in a timely manner.