The tone of analysts and managers on earnings calls can influence returns for investors. But the tone of analysts, in particular, is especially impactful for institutional investors.
That’s the main finding in “Differences in Conference Call Tones: Managers vs. Analysts,” by Paul Brockman, CFA, Xu Li, and S. McKay Price, published in CFA Institute Financial Analyst Journal.
We spoke with S. McKay Price about the team’s research and how investors might apply it.
Why evaluate analysts’ tone on earning calls?
Financial analysis is based largely on “hard information,” according to Price. That tends to mean actual numbers in financial statements, press releases, and other SEC filings that analysts then compare to expectations.
“Soft information,” on the other hand, is textual narratives and descriptive details about a company’s results. This material can be found in SEC filings, management’s media messaging, and other forms of communication.
Soft or hard, Price refers to this kind of data as static information: Management has prepared and disseminated it without interacting with or responding to investors.
Price and his associates decided to evaluate earnings call transcripts that contain narrative or “soft information” that is “dynamic,” meaning it reflects the exchanges — the give and take — between executives and investors after management’s prepared remarks, theorizing that it could yield insights on stock performance.
What is tone and how is it measured?
The researchers measured tone by analyzing the unstructured textual data of earnings call transcripts and assigning ratings of positive, negative, or neutral to particular words. They then compared management’s tone during prepared remarks and during the exchanges with analysts.
Since they focused on the textual records, not the spoken exchanges, the researchers only measured the tone of the words themselves, not the tone of voice with which they were said.
How does management’s tone stack up?
In general, management opens each earnings call with sunny prepared remarks, Price and his associates found. Analysts then pose questions that are much less positive in tone.
Responding to these queries, company executives must think on their feet and the researchers found management’s overall tone tended to grow more negative compared to their prepared remarks.
Since firm executives often give preference to more favorably disposed analysts when fielding questions, we asked what implications this might have on the findings. Price said the practice only further supports their results since the tone gap relative to prepared remarks would be even more pronounced with skeptical analysts.
Who’s talking, who’s listening, and whose tone matters more?
Analysts do most of the speaking and pose most of the questions on earnings calls: Analysts talk and investors listen and evaluate their tone. Indeed, the researchers’ results demonstrate that investors are listening. More specifically institutional investors are listening, and they weigh the tone of the analysts’ words more heavily than they do that of management’s.
According to Price and company, institutional investors are better at evaluating these tones than retail investors, who appear to react more to the hard information, and then applying this skill to achieve positive returns.
Overall, researchers found that sophisticated investors who can analyze long-short portfolios and compare tone could generate meaningful alpha.
The findings also demonstrate that earnings calls, because of their more dynamic nature, are a useful tool for investors.
Can tone be evaluated in real time? For the benefit of retail investors?
These findings hint at how investors could glean even more actionable data from earnings calls. Asked about real-time applications, Price noted in our interview that some firms are beginning to work on analyzing the textual tone of earnings calls as they happen for retail investors.
What other communication signals are useful?
And textual tone is just one component of communication. Vocal volume and cadence, body language, and countless other cues can be just as revealing and potentially alpha-generating as the words themselves.
So what varieties of earnings call communications could be integrated into investment analysis? Price said that researchers are already looking at tone of voice and voice fluctuations as potential data sources for investors.
Moreover, with some organizations providing video feeds of earnings calls, non-verbal cues will likely receive even more attention from investors in the future and yield similarly interesting results.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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