Understanding Analysts’ Praise: Social Pleasantries or Informative Signals?

• In Event: 4.02 Financial Analyst and Investor Reaction

Abstract

Financial analysts have been known to praise management’s performance on earnings conference calls where the financial results for the most recent period are discussed. However, it is not well understood how individual investors interpret this praise where it may be dwarfed or muted in the presence of the complexity of topics discussed within and low readability of the conference call transcripts. While the archival literature has found associations between analyst praise and forecast accuracy, it remains an empirical question whether investors interpret praise as a simple social gesture or a meaningful, informative signal. Relying on processing fluency theory, we predict and find that investors will rely on analyst praise of management as a simplifying heuristic to assist in the processing of the Q&A when making valuation judgments. Our results suggest that the effect of analyst praise on investor judgments is not attributable to investors’ perceptions of analysts’ access to management, analysts’ private information, or other factors. Finally, we find that positive sentiment in analysts’ remarks that are unrelated to management or firm performance result in a different pattern of valuation judgments than analysts’ praise of management. Follow-up mediation analyses show that investor comfort mediates the effect of analyst praise on investors’ valuation judgments. Our results highlight that praise of management has a unique effect on investors’ judgments that general positive sentiment does not and contributes to the earnings call literature by extending our understanding of the effects of language sentiment on investor judgments.

Authors

• Peter Kipp, University of North Texas

• Antoinette LaBarbara Smith, Florida International University

• Yibo Zhang, Miami University