Telling the Truth During Earnings Calls

Is the CEO or CFO lying during the quarterly earnings call? How can you tell?

David F. Larcker and Anastasia A. Zakolyukina of the Stanford Graduate School of Business turned to the rich data set of quarterly calls and subsequent financial restatements. After studying Q&A sections of transcripts of hundreds of calls with CEOs and CFOs, the researchers then looked to see whether financial statements being discussed were substantially restated at some point after the call. If they were restated, Professor Larcker and Zakolyukina (a PhD student at the school)  reasoned that the executive had been “less than candid.”

They found that answers from deceptive executives:

  • have more references to general knowledge
  • fewer non-extreme positive emotions
  • fewer references to shareholders value and value creation
  • use signi significantly fewer self-references, more third person plural and impersonal pronouns
  • more extreme positive emotions
  • fewer extreme negative emotions
  • fewer certainty and hesitation words

Their performance is only 4% to 6% better than a random guess. So it’s statistically significant, but not determinative.