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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”? - PowerPoint PPT Presentation
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The Effect of Managerial “Style” on the Tone of Earnings Conference Calls
Angela DavisWeili GeDawn MatsumotoJenny Li Zhang
April 27, 2011
22
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?
33
We are a company known for being conservative.
—Greg Maffei, Microsoft CFO 1997-2000
44
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
55
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
66
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
77
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
88
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
99
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)
1010
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
1111
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
1212
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)
1313
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”
1414
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
1515
Examples of Differences between WordlistsDiction Henry L&M
Growth Yes Yes Yes
Pleased Yes Yes Yes
Proud Yes No No
Thrilled Yes No No
Bad Yes No Yes
Excited Yes No Yes
Great Yes No Yes
Harsh Yes No Yes
Achieve, Achieving No Yes Yes
Opportunities No Yes YesExceeding No Yes No
1616
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)
1717
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)
1818
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
2002 2003 2004 2005 2006 2007 2008 2009
CEO: Steve Odland
Autozone Autozone Autozone Filler Qtrs Filler Qtrs Filler Qtrs Filler Qtrs Filler Qtrs
Filler Qtrs Filler Qtrs Filler Qtrs Office Depot
Office Depot
Office Depot
Office Depot
Office Depot
1919
Effect of Style on Tone – Research Design
(1) Relation btw tone and current and future performance:
(2) Manager-specific effect:
Residual tone
itjktiit MANAGERQTRYEARFIRMRESIDUAL 0
Manager effect
ititititit
itititititit
ROAROAROAROAROARETURNLOSSSURPMBETONE
49382716
543210
Current Performance Future Performance
2020
Relation between Tone and Current and Future Performance Table 4
Tone_D Tone_H Tone_LMIntercept 1.44*** 1.66*** 0.43***MBE 0.19*** 0.33*** 0.21***SURP -0.55 -1.36 3.13**LOSS -0.23*** -0.26*** -0.25***RETURN 0.11* 0.29*** 0.31***ROA 0.50 3.23*** 2.32***ROAt+1 -0.63 3.49*** 1.78***ROAt+2 0.40 2.30*** 1.51**ROAt+3 0.23 1.52** 0.34
ROAt+4 0.15 -0.13 0.14
Adj R2 2.40% 9.3% 8.8%
2121
Manager Effect on Residual ToneTable 5, Panels A & B
Tone_D Tone_H Tone_LMBase Adj R2 38% 37% 36%
Full Adj R2 44% 41% 41%
F-stat 4.72 3.39 4.05
p-value 0.001 0.001 0.001
Significant effects:
5% level 29% 20% 22%
10% level 37% 31% 31%
Percent negative 46% 46% 42%
2222
Market Reaction to Tone – Research Design
Relation btw 3-day returns and tone:
itjitFULL
ititititit
ititititit
MANAGERTONE
ROAROAROAROAROARETURNLOSSSURPMBECAR
1110
493827165
43210
Future PerformanceResidual
ToneManager
Effect
Current Performance
2323
Market Reaction to ToneTable 6, Panel B
Tone_D Tone_H Tone_LMIntercept -0.050*** -0.037*** -0.032***MBE 0.039*** 0.040*** 0.038***SURP 0.816*** 0.799*** 0.765***LOSS 0.015** 0.014** 0.015*RETURN -0.059*** -0.058*** -0.061***ROA 0.054 0.051 0.31
ROAt+1 -0.049 -0.047 -0.070
ROAt+2 0.102 0.107 0.091
ROAt+3 0.146 0.141 0.131
ROAt+4 0.028 0.028 0.039
TONEFULL 0.012*** 0.005* 0.015***
2424
Market Reaction to Manager Specific ToneTable 6, Panel C
Tone_D Tone_H Tone_LMIntercept -0.049*** -0.036*** -0.032***MBE 0.039*** 0.040*** 0.038***SURP 0.827*** 0.803*** 0.802***LOSS 0.015** 0.014* 0.014**RETURN -0.059*** -0.058*** -0.061***ROA 0.053 0.053 0.025
ROAt+1 -0.048 -0.044 -0.064
ROAt+2 0.103 0.108 0.094
ROAt+3 0.147 0.143 0.135
ROAt+4 0.027 0.029 0.038
TONE 0.011*** 0.004 0.014***MANAGER 0.001 0.001 0.006
2525
Market Reaction to Manager Specific ToneTable 6, Panel D
Tone_D Tone_H Tone_LMIntercept -0.052*** -0.037*** -0.033***MBE 0.038*** 0.040*** 0.038***SURP 0.882*** 0.803*** 0.819***LOSS 0.015** 0.014* 0.014**RETURN -0.059*** -0.058*** -0.061***ROA 0.043 0.049 0.023ROAt+1 -0.046 -0.045 -0.062
ROAt+2 0.106 0.108 0.096
ROAt+3 0.152 0.142 0.137
ROAt+4 0.031 0.028 0.038
TONE 0.010** 0.004 0.013*MANAGERPOS 0.012 0.004 0.011MANAGERNEG -0.011 -0.002 0.000
26
Robustness checks
Use only effects that are significant at the 10% level• Significantly smaller sample (500 obs)• 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)
2727
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
2828
2929
Manager-firm matched sample (Table 2A)
Firm-quarters Firms Mgrs
Initial 3,326 415 206
No Transcripts (658) (93) (46)
Fewer than 2 qtrs per firm (836) (128) (56)
Manager Firm Matched Sample 1,832 194 104
3030
Sample Selection (Table 2B)N of quarters in each
firm N of manager-firm
pairs Percentage (%) 2 18 8.61 3 22 10.53 4 19 9.09 5 23 11 6 18 8.61 7 17 8.13 8 18 8.61 9 13 6.22
10 2 0.96 11 5 2.39 12 8 3.83 13 5 2.39 14 8 3.83 15 4 1.91 16 5 2.39 17 5 2.39 18 2 0.96 19 6 2.87
20 and above 11 5.27 Total 209 100
3131
Frequency of Firms based on the number of different Managers (Table 2C)
No. of different Mgrs Freq of firms Percentage No. of Mgr-firm
pairs
1 180 92.8 180
2 13 6.7 26
3 1 0.5 3
Total 194 100 209
3232
Frequency of Managers based on the number of firm changes (Table 2D)No. of changes Freq of Mgrs Percentage No. of Mgr-firm
pairs
1 103 99 206
2 1 1 3
Total 104 100 209
3333
Descriptive statistics (Table 3)Variable N Min Q1 Mean Median Q3 Max Std. Dev.
ASSETS 4123 113.27 883 29,296 2,201 10,298 1,022,237 122,281
ROA 4123 -0.1238 0.00183 0.00863 0.00860 0.01893 0.08281 0.02581
ROAt+1 4120 -0.1231 0.00173 0.00853 0.00858 0.01874 0.08103 0.02565
ROAt+2 4111 -0.1271 0.00174 0.00823 0.00859 0.01869 0.07894 0.02596
ROAt+3 4093 -0.1271 0.00183 0.00821 0.00871 0.01874 0.07894 0.02596
ROAt+4 4018 -0.1231 0.00173 0.00828 0.00871 0.01892 0.07891 0.02561
SURP 3628 -0.07 -0.0004 -0.0004 0.0005 0.002 0.03 0.01
MBE 3630 0 0 0.72 1 1 1 0.45
LOSS 4123 0 0 0.21 0 0 1 0.40
RETURN 4235 -0.39 -0.10 0.003 -0.005 0.09 0.52 0.18
TONE_D 4390 -0.35 0.87 1.53 1.45 2.11 4.07 0.91
TONE_H 4390 -0.57 1.18 1.94 1.89 2.65 4.92 1.11
TONE_LM 4390 -1.51 0.00 0.58 0.52 1.12 2.92 0.87
TONE_DFULL 4290 0.67 1.51 1.88 1.86 2.23 3.23 0.54
TONE_HFULL 4290 0.35 1.31 1.78 1.74 2.20 3.60 0.67
TONE_LMFULL 4290 -1.04 -0.03 0.33 0.33 0.68 1.71 0.55
CAR 1624 -0.25 -0.03 0.007 0.006 0.05 0.28 0.08
3434
Comparsion to Compustat (Table 3)
Our sample CompustatDifference in mean
(sample vs. Compustat)
Variable Mean Median Mean Median
ASSETS 29,296.46 2,200.90 3,531.07 202.97 25,765.39***
ROA 0.00863 0.00860 -0.03491 0.00249 0.0435***
ROAt+1 0.00853 0.00858 -0.03490 0.00249 0.0434***
ROAt+2 0.00823 0.00859 -0.03496 0.00248 0.0432***
ROAt+3 0.00821 0.00871 -0.03491 0.00246 0.0431***
ROAt+4 0.00828 0.00871 -0.03408 0.00249 0.0424***
SURP -0.0004 0.0005 -0.003 0.0003 0.002***
MBE 0.72 1 0.65 1 0.07***
LOSS 0.21 0 0.42 0 -0.21***
RETURN 0.003 -0.005 0.022 -0.007 -0.02***
3535
Correlation Matrix
TONE_D TONE_H TONE_LM VCAR MBE SURP LOSS RETURN ROAt+1
TONE_D 1.000 0.610 0.646 0.081 0.124 0.073 -0.154 0.054 0.057
TONE_H 0.614 1.000 0.682 0.100 0.191 0.106 -0.233 0.101 0.224
TONE_LM 0.655 0.684 1.000 0.114 0.183 0.136 -0.230 0.114 0.209
VCAR 0.068 0.085 0.098 1.000 0.284 0.341 -0.062 -0.055 0.066
MBE 0.123 0.194 0.183 0.242 1.000 0.777 -0.205 0.106 0.206
SURP 0.082 0.120 0.146 0.158 0.459 1.000 -0.145 0.162 0.102
LOSS -0.148 -0.234 -0.233 -0.033 -0.205 -0.279 1.000 -0.111 -0.460
RETURN 0.049 0.099 0.112 -0.050 0.107 0.090 -0.092 1.000 0.153
ROAt+1 0.084 0.224 0.199 0.061 0.168 0.149 -0.389 0.161 1.000
3636
Summary Statistics on Manager Effects (Table 5c)
Q1 Mean Median Q3 % Neg
EFFECT_TONE_D -0.37 0.0002 0.05 0.35 46%
EFFECT_TONE_H -0.29 0.030 0.03 0.37 46%
EFFECT_TONE_LM -0.27 0.027 0.08 0.30 42%
3737
Summary Statistics on Firm Effects (Untabulated)
Overall Tone
Q1 Mean Median Q3
EFFECT_TONE_D 0.16 0.63 0.59 1.04
EFFECT_TONE_H 0.01 0.47 0.44 0.86
EFFECT_TONE_LM 0.97 1.34 1.28 1.68
3838
Relation between Tone and Current and Future Performance CFO vs. CEO (Tone_D only)
Base CEO interactionIntercept 1.22*** 0.58***MBE 0.14*** 0.14**SURP 0.64 0.16
LOSS -0.27*** 0.18**RETURN 0.12 -0.05
ROA 0.40 0.63
ROAt+1 -0.52 0.76
ROAt+2 -0.23 1.57
ROAt+3 0.40 -0.28
ROAt+4 -0.01 -0.59
3939
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)]
4040
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