How to Talk Down Your Stock Performance

Abstract

We analyze two competing hypotheses of how markets perceive (a lack of) factual language when senior management verbally conveys information in earnings calls. On one hand, avoiding complex terminology in favor of a broader language could improve the accessibility of financial disclosures. On the other hand, markets could interpreted the absence of precise financial terminology as blathering, i.e. obfuscating information by ‘beating around the bush.’ We observe lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use a less precise language, supporting the argument that an excessive use of non-factual language is perceived as blathering that retards the reduction of information asymmetries. ‘Beating around the bush’ is particularly pronounced when earnings management is more likely, when analysts' questions are tougher, and when last quarters' return on equity was poor.