When you listen to earnings calls regularly, you might start to get a feel for the people you listen to. Some CEOs might strike you as friendly and optimistic, others might seem hard and determined.
It seems so mundane and obvious, but other people's verbal ticks and tone can tell you a lot -- especially on earnings calls, where scripts are pretty basic and PR oversight is lacking.
The impact of managers on the "tone" of earnings calls
While financial statements, annual reports, and press releases go through an army of professional vetters before you see them, earnings calls are notable because they are relatively unconstrained.
Executives often speak without a script, particularly during the question & answer session, and thus there's an opportunity to gain some extra insights into what they think of the company, its prospects, and its performance.
That is why we listen to earnings calls, right? We want to get some extra insight and information about the company and a clue about what's going to happen next. Executives can't lie outright, but they can add tone to a piece of information, and that is often what we're looking for.
The trouble is that, just like us, managers have personalities.
So if the CEO sounds positive about a new product, or skeptical of a sale, or whatever it might be, it might not have anything to do with the matter at hand, but rather with the CEO as a person.
How far can personality go?
To uncover the extent to which personality influences earnings calls, researchers analyzed a wealth of call data and looked for certain keywords that signaled optimism or pessimism.
The results are filled with fun facts.
For example, female executives tend to use less optimistic language than male executives. Same goes for those with investment banking experience -- former investment bankers are less optimistic than those from other fields. On the other hand, executives who are involved with charitable organizations use more optimistic language than those who aren't.
In other words, who a manager is as a person influences the way he or she sounds on the phone. This is consistent across companies and across time, meaning that -- just like your personality -- the way people speak is just, well, the way they speak.
Why should I care about this?
The study also uncovered a market reaction effect to managers that was based just on their tone -- in other words, it's not just individual investors, but the market as a whole that can respond to a manager's personality instead of the story of the company.
So, whether or not you are new to the whole earnings call scene, you might mistake an optimistic (or pessimistic) tone for good (or bad) information, when really it's just noise.
After all, as humans we want to see a narrative in everything. However, the narrative of the company you're invested in does not necessarily have anything to do with the way the CEO sounds when talking about it.
How to avoid the personality trap
First, get to know your executives.
The best way to do this is to find a few other calls, especially from a time when the executive worked for another company, to get an idea of his or her personality. You might quickly find that this particular person tends to be conservative with projections or optimistic about new markets. Once you have an idea of the personality you're dealing with, it will be much easier to see past it.
Second, try to separate content from tone. In other words, do your own analysis of the company's strategy and prospects instead of following along with the executive team's conclusions. It sounds obvious, but this can be hard to do in practice.
And of course, that doesn't mean that tone is useless. It can tell you a lot about the executives and how they might be managing in the background. If your gut is telling you the CEO sounds sleazy or the CFO is answering questions too confidently, it could be a good data point for your analysis.
After all, executives are people too. Don't be fooled by the feeling that you'd like to grab a beer with an executive, but don't ignore it either.