EXPRESS: Can Words Speak Louder than Actions? Using Top Management Teams’ Language to Predict Myopic Marketing Spending

Abstract

Myopic marketing spending—curtailing marketing and research and development expenses to boost earnings—damages firms’ long-term value. Despite this, Top Management Teams (TMTs) are often myopic and by the time investors or boards detect such short-termism, it is too late to react or intervene. This research introduces a novel prediction method by analyzing the language TMTs use in earnings’ calls, specifically focusing on marketing and earnings emphasis, to predict future instances of myopic marketing spending. Through linguistic dependency parsing of almost 11 million sentences extracted from nearly 25,000 quarterly earnings call transcripts of 1,197 firms between 2008–2019, we demonstrate the proposed approach can predict myopic marketing spending at a quarterly frequency for up to one year in advance. We find that one standard deviation increase in earnings emphasis is associated with 23.68% increase in the likelihood of future myopic marketing spending. Investments based on the proposed approach produce 1.61% additional annual abnormal returns compared to models that exclusively use known predictors of myopic marketing spending, while offering earlier foresight and more frequent opportunities for interventions. This reduces information asymmetry for investors and boards of directors.