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The Effect of Managerial “Style” on the Tone of Earnings Conference Calls

The Effect of Managerial “Style” on the Tone of Earnings Conference Calls. Angela Davis Weili Ge Dawn Matsumoto Jenny Li Zhang April 27, 2011. Research Questions. Does a manager’s “style” impact the tone expressed in conference calls? What is “style”? What is “tone”?

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The Effect of Managerial “Style” on the Tone of Earnings Conference Calls

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  1. The Effect of Managerial “Style” on the Tone of Earnings Conference Calls Angela Davis Weili Ge Dawn Matsumoto Jenny Li Zhang April 27, 2011

  2. Research Questions Does a manager’s “style” impact the tone expressed in conference calls? What is “style”? What is “tone”? Does the market react to the portion of tone that is manager-specific? 2

  3. We are a company known for being conservative. —Greg Maffei, Microsoft CFO 1997-2000 3

  4. We are a company known for being conservative. —Greg Maffei, Microsoft CFO 1997-2000 I believe in being disciplined but aggressive. —Chris Liddell, Microsoft CFO 2005-2009 4

  5. Motivation Recent interest in the use of language to convey (or obscure) information to the capital markets Readability of annual report disclosures (Li 2008) Deceptive language in conference calls (Larcker and Zakolyukina 2010) “Tone” in corporate disclosures (Davis et al. 2010; Demers and Vega 2010; Frankel et al. 2009; Price et al. 2010) Overall conclusion: tone conveys information beyond concurrent, quantifiable information Market reaction to tone, controlling for current performance 5

  6. Motivation BUT: other factors likely influence tone Incentives to bias (Lang and Lundholm 2000) Unintentional bias Recent studies have shown manager-specific effects in financial reporting choices: Dyreng et al. 2010 -- Tax avoidance behavior Bamber et al. 2010 & Yang 2010 – Disclosure behavior Ge et al. 2011 – Accounting choices 6

  7. Contribution Evidence that manager-specific factors influence tone Separate from current performance, future performance, firm and quarter effects Manager effects are large relative to other contexts Suggests tone is more than just a function of economic events Some evidence that the market reacts to the manager-specific component of tone for optimistic managers but not pessimistic managers Consistent with the market identifying and discounting manager-specific pessimism but not manager-specific optimism 7

  8. What is “style”? • Systematic choice made by a manager across situations • “Upper echelons” theory (Hambrick and Mason 1984) • Contrary to “neoclassical” view of the firm • Operationalization: Manager fixed effects controlling for firm and time effects • Determinants of style • Prior experiences • Personality/disposition 8

  9. What is “tone”? • Optimism/pessimism expressed in corporate disclosures • Operationalization: Counts of words deemed positive/negative • Determinants of tone • Positive/negative economic events (content) • Manager choice of how to describe these events (language) 9

  10. Does manager style impact tone? • Style impacts choices more when manager discretion is higher • Hambrick 2007 • Ge et al. 2011 • Choice of language relatively unconstrained • Not subject to GAAP, audits, SEC regulation • Particularly in conference calls 10

  11. Does manager style impact tone? • But style impacts choices more when optimal decision is ambiguous (bounded rationality) • Systematic over/under optimism can be costly • Optimistic language increases probability of class action lawsuits (Rogers et al. 2010) • But bias may be unintentional • Dispositional optimism • Prediction: Style impacts tone 11

  12. Does the market react to style? • Some evidence the market differentially prices tone • Cross-sectional variation in “tone response coefficient” based on firm-specific credibility measures (Demers and Vega 2010) • Some evidence the market recognizes style • Greater market reaction to forecasts of high forecast accuracy managers (Yang 2010) 12

  13. Does the market react to style? • Difficult to identify “unwarranted” optimism ex ante • Pricing of discretionary accruals (Xie 2001); pro forma earnings (Doyle et al. 2003) • Increased shareholder litigation consistent with markets being misled (Rogers et al. 2010) • Experimental evidence investors react to language • Vivid vs. pallid language (Hales et al. 2011) • Identifying “language style” more difficult than “accuracy of forecast style” 13

  14. Measures of Tone • Frequency counts of positive vs. negative words • Separate presentation from Q&A • Use only comments in Q&A spoken by specific manager • Three dictionaries used: • TONE_D: Diction (Davis et al. 2010) • TONE_H: Henry (2006, 2008); Henry and Leone (2009) • TONE_LM: Loughran and McDonald (2009) • TONE_i = (positive words – negative words) ÷ total words 14

  15. Examples of Differences between Wordlists 15

  16. Excerpts from transcripts: • “We’re excited about the accelerator, but we’re even more excited about by Flash.” (John East, CEO, Actel 7/23/02) • “During the call today, I’m going to focus my comments on the excitement, the opportunities, the optimism and the commitment to achieving results that are being created within this new enterprise.” (Bob Wood, CEO, Chemtura 7/29/05) • “I am very proud of the remarkable growth and progress Yahoo! has demonstrated throughout this past year.” (Terry Semel, CEO, Yahoo 1/17/06) • “We’re really thrilled by the way customers are responding to these stores as they’re performing extremely well and they’re exceeding our sales expectations.” (George Jones, CEO, Borders 5/27/08) 16

  17. Sample Construction • Identify CEOs/CFOs who have occupied the CEO/CFO position in at least two companies for at least one year in each firm between 2002 and 2009 • Gather conference call transcripts for firm quarters between 2002 and 2009 • Eliminate managers who did not participate in at least two quarterly conference calls at each firm • 104 CEOs and CFOs in our sample (69 CFOs, 31 CEOs, 4 CEO/CFOs) 17

  18. Sample Construction • “Manager-firm matched sample” are firm-quarters of those managers who move firms (for which we measure fixed effects) • “Filler quarters” are firm-quarters for which we do not estimate a manager fixed effect (because manager does not move firms) Disentangle CFO-specific effects from firm-specific and time-specific effects 18

  19. Effect of Style on Tone – Research Design (1) Relation btw tone and current and future performance: Current Performance Future Performance Residual tone (2) Manager-specific effect: Manager effect 19

  20. Relation between Tone and Current and Future Performance Table 4 20

  21. Manager Effect on Residual ToneTable 5, Panels A & B 21

  22. Market Reaction to Tone – Research Design Relation btw 3-day returns and tone: Current Performance Future Performance Residual Tone Manager Effect 22

  23. Market Reaction to ToneTable 6, Panel B 23

  24. Market Reaction to Manager Specific ToneTable 6, Panel C 24

  25. Market Reaction to Manager Specific ToneTable 6, Panel D 25

  26. Robustness checks Use only effects that are significant at the 10% level Significantly smaller sample (500obs) No overall relation between returns and manager specific component of tone Positive relation for optimistic managers but only using Diction measure Use decile ranks of manager effects Positive coefficient using L&M at 10% level Positive coefficient on top decile indicator for Diction (1% level) and L&M (5% level)

  27. Summary and Conclusion • Manager “style” has a significant impact on tone of presentation and Q&A • Impact is larger than “style” effects in other contexts • Some evidence that the market prices the manager-specific component of tone for optimistic managers but not pessimistic managers • BUT, need to check robustness of results • Next steps: • Intraday trading data to measure price reactions • Increase sample size 27

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  29. Manager-firm matched sample (Table 2A) 29

  30. Sample Selection (Table 2B) 30

  31. Frequency of Firms based on the number of different Managers (Table 2C) 31

  32. Frequency of Managers based on the number of firm changes(Table 2D) 32

  33. Descriptive statistics(Table 3) 33

  34. Comparsion to Compustat (Table 3) 34

  35. Correlation Matrix 35

  36. Summary Statistics on Manager Effects (Table 5c) 36

  37. Summary Statistics on Firm Effects (Untabulated) 37

  38. Relation between Tone and Current and Future PerformanceCFO vs. CEO (Tone_D only) 38

  39. Compute F-statistics F-statistics = (R2 – R2*)/J (1-R2)/(N-J-K) For Tone_D: F-stat = (0.48656-0.412392)/99 = 4.72 (1-0.48656)/[3523-99-(177+7+3)] 39

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