Linguistic Research of Earnings Calls Transcripts Provides Important Clues about Firms and CEOs, say Researchers

Earnings CallsListening in to the earnings calls of a company provides investors and analysts the opportunity to get a glimpse into its performance, management, and strategic vision. The company’s executives discuss financial results and answer questions at earnings calls. Conference call transcription allows one to evaluate the details missed in the conference call and gain important historical information. The calls help companies comply with transparency regulations. The Chicago Booth Review recently reported that researchers are finding messages in the conference calls that managers inadvertently send which investors should pay attention to.

Listening in to conference calls allows shareholders and analysts to benefit in many ways:

  • Provides information about the company’s management: An article in Seeking Alpha rightly points out that the language and the tone that the company’s top executives use in the conference call, what they say, and the manner in which they answer analysts’ questions can convey a lot about the management.
  • Insight into earnings: Earnings calls provide a picture of the company’s revenue stream, how it is developing, if there are any hurdles, and how the company plans to tackle these issued.
  • Information about customers and market trends: If you are planning investments across the industry value chain, you need to have information about current and potential customers. You can ask questions about these matters while participating in earnings calls. The management’s responses about growth areas and losses would provide information about economic trends that could be crucial for future investment decision making.
  • Q&As: Journalists and financial advisors actively participate in the question-and-answer segment. This is a great opportunity to go beyond numbers and get a more complete picture that will help you make a wise investment decision.

Conference call transcription companies convert earnings calls into readable, searchable text records that can be archived and used to review historical information. Earnings call transcription is especially important when the audio lacks clarity. Moreover, going through the transcripts saves time as compared to listening to the audio.

While the metrics in an earnings call can provide a view of the company’s growth and financial strength, academic researchers from Chicago Booth and the University of Michigan say that looking deeper into the language used during earnings calls can provide other more valuable information. They say that things like a CEO’s adverb density, words per sentence, or use of euphemisms could uncover important clues about and glimpses into the firm – and importantly – its management.

The researchers’ analysis of 17,419 transcripts allowed them to evaluate how knowledge was distributed among various executive teams and gauge how that distribution affected the firm’s financial performance. They used the language that appears in conference call transcription as well as biographical data about executives to decode the personality of CEOs, and then cross-referenced this information to firms’ performance, investment, financing choices. The team made several other interesting observations after researching the language and words used in earnings calls transcripts:

    Earnings Calls

  • CEOs and CFOs who were presumed knowledgeable because they spoke more also tended to receive higher compensation than the rest of the executive team
  • Firms with mismatched compensation strategies (i.e., CEOs who talked more but got paid less) had lower firm value than those where talk time and compensation matched.
  • The lingo used by managers can provide a cue of how the firm feels about its results-or how it expects the market to react to them. If the CEO tells analysts that “lumpiness,” “headwinds,” or a “wait-and-see” period is on the way, it may be time for investors to adjust their portfolio.
  • Euphemistic earnings calls tend to considerably delay negative investor reaction. The researchers say that CEOs use euphemisms to mislead and not scare away investors.
  • CEOs who were “agreeable” were more prone to using adverbs, fewer words per sentence, and vague quantifiers during the Q&A sessions.
  • Extroverted CEOs used fewer quantifiers, fewer words per sentence, and more so-called anxiety words, such as “worried” or “fearful”.
  • Companies of CEOs who have extroverted personalities were more likely to have lower cash flows and lower returns on assets.
  • CEOs presumed to be more conscientious tended to run slower-growth companies, while companies of those who had openness as a dominant trait focused more on R&D.
  • To address analyst concerns, CEOs tended to use contrastive words like “but” as a way to provide unexpected bits of information during the latter portion of the call.

The researchers point out that studying intonation, awkward pauses, and other auditory details can provide even more information about an executive’s temperament.

Analysts could study earnings calls in such detail only because of the availability of transcripts. Best practices require companies to make earnings calls available to the public via transcript or audio. Digital transcription companies provide high quality transcripts of conference calls to comply with these requirements. With consultants, firm suppliers and partners, bankers, and media all taking an interest in these calls, the demand for accurate and timely verbatim conference call transcription is bound to increase.

About Julie Clements

Julie Clements

Joined the MOS team in March of 2008. Julie Clements has background in the healthcare staffing arena; as well as 6 years as Director of Sales and Marketing at a 4 star resort. Julie was instrumental in the creation of the medical record review division (and new web site); and has especially grown this division along with data conversion of all kinds.