Conference Call Tone and Stock Returns: Evidence from the Stock Exchange of Hong Kong

• DOI: http://doi.org/10.1111/ajfs.12186
• Author: S. McKay Price,Xu Li,Paul Brockman
• Published date: 01 October 2017
• Date: 01 October 2017

Conference Call Tone and Stock Returns:

Evidence from the Stock Exchange of Hong

Kong*

Paul Brockman

Perella Department of Finance, College of Business and Economics, Lehigh University, United States

Xu Li

School of Business, Faculty of Business and Economics, The University of Hong Kong, Hong Kong SAR, China

S. McKay Price**

Perella Department of Finance, College of Business and Economics, Lehigh University, United States

Received 22 April 2016; Accepted 17 March 2017

Abstract

We investigate market reactions to manager and analyst tones during earnings conference

calls using company transcripts from the Stock Exchange of Hong Kong (SEHK). This is the

first study to examine the role of conference call tones outside of a US setting. Consistent

with previous US-based results, we find that positive tones lead to higher stock returns. In

contrast to US-based results, we show that investors place more emphasis on managerial

tones than on analyst tones. We also find that stock market reactions to conference call tones

are stronger for firms with a sophisticated investor base.

Keywords Conference calls; Textual analysis; Investor sophistication; Financial analysts; Hong

Kong Stock Exchange

JEL Classification: G02, G14, M14

1. Introduction

Existing research shows that investors examine both quantitative and qualitative data

when impounding information into stock prices. Using various information sources

and computer-based content analysis, previous studies have verified that the

*The project is financially supported by the General Research Fund of the Hong Kong

Government, number HKU 791613B. We thank Ryan You Xu, Fiona Lam, Meichen Yang,

and Clare Keum for their excellent research assistance.

**Corresponding author: S. McKay Price, Perella Department of Finance, College of Business

and Economics, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015, USA. Tel: +1-

610-758-4787, Fax: +1-610-882-9415, email: smp210@lehigh.edu.

Asia-Pacific Journal of Financial Studies (2017) 46, 667–685 doi:10.1111/ajfs.12186

©2017 Korean Securities Association 667

qualitative tone of information is value relevant to market prices (see, for example,

Tetlock, 2007; Henry, 2008; Davis et al., 2012; Doran et al., 2012; Price et al., 2012).

Earnings conference calls are an important form of voluntary disclosure used by many

firms to facilitate information transfer from management to investors. Such calls pro-

vide an important source of information used in content analysis, whereby researchers

examine market reactions to conference call tones. For instance, Davis et al. (2012)

extract the linguistic tones of earnings press releases and examine their relation to

future stock returns, while Price et al. (2012) extract the linguistic tones of conference

calls and show that they contain incremental information above and beyond press

releases. Brockman et al. (2015) examine the differential impact of manager tones ver-

sus analyst tones during conference calls. They also show that sophisticated institu-

tional investors are more likely to make use of such qualitative information (i.e.,

tones) than less sophisticated individual investors.

Although several studies using content analysis have been conducted over the

past several years, to the best of our knowledge, no study of conference call tones

has been performed using non-US data. In this study, we examine conference call

tones using Hong Kong firms for several reasons. First, the Hong Kong stock mar-

ket is one of the world’s major equity markets (So and Tse, 2004). In 2015 , Hong

Kong was ranked third in the world in terms of equity market capitalization, after

only the US and Mainland China. In the same year, it was ranked first for initial

public offerings (IPOs) proceeds.

1

Such an important equity market is attractive to

investors worldwide. The size and openness of the economy, the absence of foreign

exchange controls, and the stock market’s high liquidity make Hong Kong a suit-

able environment in which to examine the value relevance of conference call tones.

Second, Hong Kong earnings conference calls are conducted in English. This means

that the same methodological tools used in previous US-based studies (e.g., look-up

dictionaries) can be directly applied to our Hong Kong sample. This advantage all ows

for greater comparability with US-based studies than if we had to make use of foreign

language dictionaries to construct a set of positive and negative tone words.

Third, while Hong Kong has a well-developed economy and a sophisticated

stock market,

2

its corporate ownership is quite concentrated and includes many

1

Please refer to the article titled “Hong Kong is No. 1 Again for IPOs Globally,” The Wall

Street Journal, December 1, 2015. http://www.wsj.com/articles/hong-kong-is-no-1-again-for-

ipos-globally-1449120929

2

According to La Porta et al. (1998) and Allen et al. (2005), the legal environment in Hong

Kong resembles those of other developed markets more than that of China. For example, the

rule of law index (corruption index) is 8.22 (8.52) for Hong Kong and 8.57 (9.10) for the

UK, compared to 5.0 (2.0) for Mainland China. After comparing overall investor protection

(defined as the sum of overall creditor rights, shareholder rights, rule of law, and government

corruption) in Mainland China relative to the countries included in La Porta et al. (1998),

Allen et al. (2005) suggest that the markets in Mainland China, along with Mexico and

Indonesia, are some of the weakest financial markets in terms of investor protection, while

Hong Kong is one of the strongest.

P. Brockman et al.

668 ©2017 Korean Securities Association