Ethnic Minority Analysts’ Participation in Public Earnings Conference Calls

We investigate ethnic minority and nonminority sell-side analysts’ participation in public earnings conference calls. We find that minority analysts are underrepresented in conference call Q&A sessions, and minority analysts who do participate on the calls experience lower levels of prioritization than do nonminority analysts. Minority analysts’ lower participation rates are partially but not fully mediated by characteristics such as experience, work environment, and stock rating favorability. Additionally, firm and conference call fixed effects mediate approximately half the magnitude of lower minority participation rates. Extroverted minority analysts participate at higher rates, but the negative association between minority status and conference call participation is exacerbated when calls are more time constrained, when executive teams are less diverse, and when analysts are from less prestigious brokerage houses. Overall, we document the underrepresentation of minority analysts on earnings conference calls and provide evidence suggesting both analysts’ and managers’ choices influence minority analysts’ participation rates.     

Analysts’ stock recommendations,earnings growth and risk

A key output of sell‐side analysts is their recommendations to investors as to whether they should, buy, hold or sell a company's shares. However, relatively little is known regarding the determinants of those recommendations. This study considers this question, presenting results that suggest that recommendations are dependent on analysts’ short‐term and long‐term earnings growth forecasts, as well as on proxies for the analysts’ unobservable views on earnings growth in the more distant future and risk. Furthermore, analysts who appear to incorporate earnings growth beyond the long‐term growth forecast horizons and risk into their recommendation decisions make more profitable stock recommendations.     

A Tale of Two Stories: Sustainability and the Quarterly Earnings Call

One of the challenges companies claim to face in making sustainability a core part of their strategy and operations is that the market does not care about sustainability, either in general or because the time frames in which it matters are too long. The response of investors who say they care about sustainability—and their numbers are large and growing—is that companies do a poor job in providing them with the information they need to take sustainability into account in their investment decisions. Whatever the merits of each view, the fact remains that an effective conversation about sustainability requires the participation of both sides of the market. There are two main mechanisms for companies to communicate to the market as a way of starting this conversation: mandated reporting and quarterly conference calls. In this paper, the authors argue that neither companies nor investors can be seen as taking sustainability seriously unless it is integrated into the quarterly earnings call. Until that happens, the core business and sustainability are two separate worlds, each of which has its own narrator telling a different story to a different audience. The authors illustrate their argument using the case of SAP, the German software company. SAP was the first company to host an “ESG Investor Briefing,” a conference call for analysts and investors held on July 30, 2013 in which the company discussed both its sustainability performance and its contribution to the firm's financial performance. The narrative of this call was very similar to the narrative of the company's first “integrated report,” which was issued in 2012 and presented the company's sustainability initiatives in the context of its operating and financial performance. Nevertheless, the content and main focus of the “ESG Briefing” were very different from that of most quarterly earnings conferences, and so were the audiences. Whereas the quarterly call was attended mainly by sell side analysts—and the words “sustainability” or “sustainable” failed to receive a single mention—the ESG briefing was delivered to an investor audience made up almost entirely of the “buy side.”     

Inside the “Black Box” of Sell‐Side Financial Analysts

Our objective is to penetrate the “black box” of sell‐side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow‐up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All‐Star status, and the factors they consider indicative of high‐quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10‐K and 10‐Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross‐sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.     

A Glimpse Behind a Closed Door: The Long‐Term Investment Value of Buy‐Side Research and Its Effect on Fund Trades and Performance

We examine proprietary research produced by buy‐side analysts working for a large fund management company. We find that the buy‐side research has investment value for a one‐year horizon, and the analysts producing this research exhibit differential ability that tends to persist over time. The buy‐side research strongly influences trades made by the company's funds, especially when it coveys information that is independent of the fund managers' own information, when it is produced by buy‐side analysts with good track records, and when the underlying stocks have little sell‐side coverage. The influence of sell‐side research is concentrated primarily in stocks not followed by buy‐side analysts and in funds with low overall buy‐side coverage. The company's funds that rely more heavily on buy‐side research generate superior performance.     

A comparison of buy‐side and sell‐side analysts

There is very little research on the topic of buy-side analyst performance, and that which does exist yields mixed results. We use a large sample from both the buy-side and the sell-side and report several new results. First, while the contemporaneous returns to portfolios based on sell-side recommendations are positive, the returns for buy-side analysts, proxied by changes in institutional holdings, are negative. Second, the buy-side analysts' underperformance is accentuated when they trade against sell-side analysts' recommendations. Third, abnormal returns positively relate to both the portfolio size and the portfolio turnover of buy-side analysts' institutions, suggesting that large institutions employ superior analysts and that superior analysts frequently change their recommendations. Abnormal returns are also positively related to buy-side portfolios with stocks that have higher analyst coverage, greater institutional holding, and lower earnings forecast dispersion. Fourth, there is substantial persistence in buy-side performance, but even the top decile performs poorly. These findings suggest that sell-side analysts still outperform buy-side analysts despite the severe conflicts of interest documented in the literature.     

Fair Value‐related Information in Analysts’ Decision Processes: Evidence from the Financial Crisis

We use a sample of conference calls and analyst research reports from international banks to examine how financial analysts request and communicate fair value‐related information in their valuation process. We find that analysts devote considerable attention to fair value‐related topics. Most of the conference call questions and references in research reports pertain to fair value reclassifications and fair value changes of liabilities resulting from banks’ own credit risk. The accounting impact of these one‐time effects during the financial crisis and a lack of corresponding firm disclosures help to explain the prevalence of these two topics. The content of the questions and references suggests that analysts have different motives for their interest in fair value‐related information. While some analysts adjust reported earnings for unrecognised fair value changes of reclassified assets, most of the observed analysts exclude banks’ own credit risk effects from reported earnings. Thus, the use of fair value‐related information varies substantially across analysts and across instruments.     

Manager-analyst conversations in earnings conference calls

Prior research finds that intraday stock prices move considerably during the discussion period of earnings conference calls. In this study, we explore what features of the manager-analyst dialogue during the discussion drive these price movements. We textually analyze the tone of managers and analysts and find that intraday prices react significantly to analyst tone, but not to management tone, for the full duration of the discussion. This effect strengthens when analyst tone is relatively negative. We then present intraday visual evidence that analysts are more neutral than managers over the call and that the tones of both parties drift downward as the call progresses. Overall, our findings illustrate how manager-analyst information exchanges evolve on earnings calls and indicate that analysts are the participants on earnings calls whose comments move stock prices during the discussion.     

Words versus Deeds: Evidence from Post‐Call Manager Trades

We examine the impact of conference call tones on the direction and magnitude of subsequent manager trades. Our univariate results show that corporate insiders buy company shares following negative‐tone conference calls and sell shares following positive‐tone conference calls. This inverse call tone–trading pattern holds for both managers’ introductory sessions and subsequent question‐and‐answer (Q&A) sessions. Our multivariate results confirm the univariate call tone–trading patterns and show that contrarian manager trades are mostly driven by managerial selling activity. In contrast to the consistent and strong evidence of managers trading in the opposite direction of their call tones, we find no evidence of managers trading in the same direction of their call tones. We also examine the impact of analyst Q&A challenges on post‐call manager trades. Our findings suggest that managers learn from analyst feedback and adjust their post‐call trades accordingly.     

The Power of Voice: Managerial Affective States and Future Firm Performance

We measure managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software. We hypothesize and find that, when managers are scrutinized by analysts during conference calls, positive and negative affects displayed by managers are informative about the firm's financial future. Analysts do not incorporate this information when forecasting near‐term earnings. When making stock recommendation changes, however, analysts incorporate positive but not negative affect. This study presents new evidence that managerial vocal cues contain useful information about a firm's fundamentals, incremental to both quantitative earnings information and qualitative “soft” information conveyed by linguistic content.     

Earnings Conference Call Content and Stock Price: The Case of REITs

Using computer based content analysis, we quantify the linguistic tone of quarterly earnings conference calls for publicly traded Real Estate Investment Trusts (REITs). After controlling for the earnings announcement, we examine the relation between conference call tone and the contemporaneous stock price reaction. We find that the tone of the conference call dialogue has significant explanatory power for the abnormal returns at and immediately following quarterly earnings announcements. The question and answer portion of the conference calls dominates prepared managerial introductory remarks in explanatory significance. Furthermore, an overall positive tone in the conference call discussion between management and analysts is found to nearly offset the damaging effects of a negative earnings surprise.     

Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts

This paper examines whether analysts resident in a country make more precise earnings forecasts for firms in that country than non-resident analysts. Using a sample of 32 countries, we find an economically and statistically significant local analyst advantage even after controlling for firm and analyst characteristics. The local advantage is high in countries where earnings are smoothed more, less information is disclosed by firms, and firm idiosyncratic information explains a smaller fraction of stock returns. It is negatively related to whether a firm has foreign assets and to market participation by foreign investors and by institutions, and positively related to holdings by insiders. The extent to which U.S. investors underweight a country's stocks is positively related to that country's local analyst advantage.     

Information transfer and conference calls

A long-standing literature documents intra-industry capital market co-movements around earnings releases, yet the dynamics of these information transfers remain largely unexplored. We provide evidence on both the sources and channels of information transfers by separating two distinct events within the reporting window using intra-day data and by exploring potential mechanisms of information flows. We document that the co-movement of absolute and signed stock returns over the conference call windows of announcing firms and their industry peers are statistically and economically larger than the co-movement over the corresponding earnings announcement windows. Turning to mechanisms, we find that shared analyst coverage, coverage by analysts providing industry recommendations, shared institutional ownership, and joint financial media mentions are each individually and incrementally associated with higher rate of information transfer over both the earnings announcement and conference call windows. Textual analyses reveal that peer mentions and macroeconomic discussions both significantly contribute to conference call information transfers.     

Do Weather‐Induced Moods Affect the Processing of Earnings News?

We investigate whether unpleasant environmental conditions affect stock market participants’ responses to information events. We draw from psychology research to develop a new prediction that weather‐induced negative moods reduce market participants’ activity levels. Exploiting geographic variation in equity analysts’ locations, we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather. Price association tests find evidence consistent with reduced activity due to weather‐induced moods delaying equilibrium price adjustments following earnings announcements. We also use our analyst‐based research design to re‐examine an existing prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities, and contributes to the broader psychology and economics literature on the impact of weather‐induced mood on labor productivity.     

Does Regulation FD work? Evidence from analysts' reliance on public disclosure

We examine how Regulation FD changed analysts' reliance on firms' public disclosure. Regulation FD is associated with a stronger analyst response to earnings announcements, management forecasts and conference calls—that is, analysts respond to these events more quickly, more frequently and with larger forecast revisions after FD. Further, following public disclosure, the decline in analyst forecast dispersion and forecast error accelerates after FD. We find no such changes either for foreign ADR firms or around several confounding events. Overall, Regulation FD levels the playing field between the analysts and individual investors, thereby promoting “fair game” property of the market.     

Underlying risk preferences and analyst risk-taking behavior

We investigate the relationship between underlying risk preferences on analysts’ work-related decisions. Specifically, we examine whether facial width-to-height ratio (fWHR), an innate personal characteristic that has been linked to financial risk tolerance, is associated with analysts’ stock coverage decisions and the boldness of their earnings forecasts and stock recommendations. We find that high-fWHR analysts cover firms with lower earnings predictability, and issue bolder forecasts and recommendations. Our findings shed new light on the black box of analyst decision making, assisting investment practitioners in evaluating the information content produced by different types of analysts and understanding the observed dispersion in analyst forecasts.     

An Examination of the Differential Impact of Regulation FD on Analysts' Forecast Accuracy

Regulation fair disclosure (FD) requires companies to publicly disseminate information, effectively preventing the selective pre‐earnings announcement guidance to analysts common in the past. We investigate the effects of Regulation FD's reducing information disparity across analysts on their forecast accuracy. Proxies for private information, including brokerage size and analyst company‐specific experience, lose their explanatory power for analysts' relative accuracy after Regulation FD. Analyst forecast accuracy declines overall, but analysts that are relatively less accurate (more accurate) before Regulation FD improve (deteriorate) after implementation. Our findings are consistent with selective guidance partially explaining variation in the forecasting accuracy of analysts before Regulation FD.