"Casting" a Doubt: Informational Role of Analyst Participation During Earnings Conference Calls

• In Event: Information Dynamics in Conference Calls

Abstract

Prior literature provides evidence that earnings conference calls are informative to market participants, with analyst participation, on average, being particularly important (Matsumoto et al. 2011). However, more recent research also suggests that firms “cast” their conference calls on average, by calling on favorable analysts in order to decrease scrutiny, facilitate the hiding of bad news, and temporarily inflate equity values (Cohen et al. 2015). Together, these results make it unclear whether stock price responses to conference call Q&As reflect information about fundamental value or strategic casting leading to mispricing. To examine this issue, we focus on conference calls at the conversation level. That is, we study over 215,000 analyst-manager turns-at-talk that comprise roughly 20,000 dialogs between managers and individual analysts to explore the extent to which individual analysts with varying incentives scrutinize managers during conference calls. Using intra-day trading data during call hours, we analyze how market participants respond to such scrutiny real time. We find evidence that although favorable analysts scrutinize management less than unfavorable analysts, when the forecast of a favorable analyst gets missed such an analyst scrutinizes management similar to the unfavorable analyst. Furthermore, investors appear to discern information from such scrutiny. These results suggest that “casting” favorable analysts does not always lead to lower scrutiny or stock mispricing. We also identify how the combination of recommendation favorableness and missed analyst specific targets shapes the structure of conference call dialogs and the nature of the conversations between management and individual analysts.

Authors

• William J Mayew, Duke University

• Mani Sethuraman, Cornell University

• Mohan Venkatachalam, Duke University