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.
Sources:
- Larcker, David F. and Zakolyukina, Anastasia A., Detecting Deceptive Discussions in Conference Calls (July 29, 2010). Rock Center for Corporate Governance at Stanford University Working Paper No. 83. Available at SSRN: http://ssrn.com/abstract=1572705
- How to tell when your boss is lying in The Economist