Bridge over ocean
16 March 2020 Financial Analysts Journal Volume 76, Issue 2

When Managers Change Their Tone, Analysts and Investors Change Their Tune

  1. Marina Druz
  2. Ivan Petzev
  3. Alexander F. Wagner
  4. Richard Zeckhauser

The tone of managers’ language during corporate earnings conference calls – particularly changes in negativity – reveals valuable clues about future company fundamentals. Analysts respond to these signals but not sufficiently.

The negativity of managerial word choice (managerial tone) in conference calls is a telltale indicator of a company’s future. Specifically, increases in negativity–what we term “bleak tone changes”–strongly predict lower future earnings and increased uncertainty. Decreases in negativity, however, only weakly predict the opposite. To isolate the explanatory power of managerial tone, we controlled for negativity changes in the earnings press release and analysts’ questions. Analysts and investors underreact when they extract value-relevant information from negativity changes. Consequently, a negativity-based trading strategy generates abnormal returns.
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