EARNINGS CONFERENCE CALLS AND INSTITUTIONAL MONITORING: EVIDENCE FROM TEXTUAL ANALYSIS

• Date: 01 March 2020
• Published date: 01 March 2020
• Author: Xueli Cao,Dave Berger,Kuntara Pukthuanthong,Arash Amoozegar
• DOI: http://doi.org/10.1111/jfir.12199

The Journal of Financial Research Vol. XLIII, No. 1 Pages 5–36 Spring 2020

DOI: 10.1111/jfir.12199

EARNINGS CONFERENCE CALLS AND INSTITUTIONAL MONITORING:

EVIDENCE FROM TEXTUAL ANALYSIS

Arash Amoozegar

Bank of Canada

Dave Berger

Oregon State University

Xueli Cao and Kuntara Pukthuanthong

University of Missouri

Abstract

We document the effects of institutional investors on the qualitative information

disclosure of firms during earnings conference calls. Using conference call and

institutional ownership data between 2005 and 2016, we find that aggregate

institutional ownership dampens conference call tone. The effects of institutional

investors on tone are causal based on results from indexed firms. Consistent with

hypotheses regarding investors’horizons, short‐term institutional investors are

associated with a more positive conference call tone, as well as more opportunistic

trading, whereas long‐term investors are associated with a more negative tone.

Market participants can generally disentangle the impact of institutional investors on

tone based on investor type.

JEL Classification: G14, G23, G30, O16

I. Introduction

We consider institutional ownership in the context of firm disclosure tone. Despite the

extensive literature covering institutional investors and definite firm behavior, the

literature investigating the influence of institutional investors on the qualitative

information of firms’disclosure practices is limited. For example, Price, Salas, and

Sirmans (2015) study conference call length in the context of governance mechanisms,

including institutional ownership. Our research complements their study and extends

existing research by investigating the relation between institutional investors and the

affective tone of earnings conference calls. This research provides insight into the

nebulous relationship between institutional investors and corporate managers, and

demonstrates that institutional investors affect firm behavior in subtle ways.

Research documents that managers may strategically alter disclosure content

and tone. For example, Li and Zhang (2015) employ a natural experiment to

demonstrate the effects of stock price behavior on a manager’s voluntary disclosure.

Following an increase in short‐selling pressure, they find that managers reduce the

precision of bad news forecasts. Furthermore, Huang, Teoh, and Zhang (2014) and

Arslan‐Ayaydin, Boudt, and Thewissen (2016) argue that managers strategically set the

5

© 2019 The Southern Finance Association and the Southwestern Finance Association

tone of qualitative information releases to mislead investors. Brochet, Loumioti, and

Serafeim (2015) relate the disclosure horizon to management’sshort‐term incentives and

find that short‐term disclosures can be associated with myopic managerial behavior.

Because the call transcripts are publicly available, a voluminous number of papers

examine conference calls made by different participants and different parts of the

transcript. Chen, Demers, and Lev (2018) document that the tone of the conversations

between analysts and managers becomes increasingly negative with time.

Further research documents that institutional investors are able to influence

managers and corporate policy. Admati and Pfleiderer (2009) show that large

shareholders may exert selling pressure when managers do not act in the best interest of

shareholders. Alternatively, Aghion, Van Reenen, and Zingales (2013) show that

managerial turnover is less sensitive to firm performance when institutional investors

are present. Recently, Harford, Kecskés, and Mansi (2018) demonstrate that long‐term

investors can improve firm governance and reduce managerial misbehavior. Bena et al.

(2017) identify the positive role of foreign institutional ownership and challenge the

view that foreign investors discourage long‐term investment. Appel, Gormley, and

Keim (2016) show that even passive institutional investors can exert influence on firm

governance and improve long‐term performance. He, Huang, and Zhao (2019) show

that institutional cross‐ownership alleviates the externalities and inefficiency in

corporate governance. Dong, Lin, and Zhan (2017) show institutional investors induce

firms to invest more in corporate social activities. However, there have been only a few

papers investigating the role of institutions on voluntary disclosure. Using management

forecast by firms as voluntary disclosure, Tsang, Xie, and Xin (2019) show that foreign

institutional investors improve voluntary disclosure and their impact is more

pronounced than that of domestic institutional investors.

Our article combines the two literature streams discussed above. In particular,

given that managers may strategically alter tone and that institutional investors have

been shown to affect corporate actions, we study the impact of institutions on earnings

conference call tone. We are not the first to link institutional investors to conference

call dynamics. Price, Salas, and Sirmans (2015) study how various corporate

governance measures affect the incidence and length of earnings conference calls.

One of their corporate governance measures is institutional ownership. They show

institutional ownership is associated with longer conference call duration and argue

that “institutions push for more frequent and longer conference calls in order to obtain

more information with which to evaluate their investment”(p. 181). However, as they

do not consider any other aspects of conference calls besides call length, we view our

results on conference call tone and horizon to be complementary. Blau, DeLisle, and

Price (2015) show that different types of investors interpret conference call tone

differently, with sophisticated investors exhibiting skill at detecting tone that is overly

inflated. We complement this line of research by investigating a causal relation

between institutional investors and the tone of conference calls. Our research sheds

light on the relation between institutional investors and firm actions when actions are

subjective. This contrasts the research that documents the relation between institutional

investors and concrete corporate policy. The qualitative nature of conference call tone

may allow institutional investors to influence managers in a manner that would not be

6 The Journal of Financial Research

feasible for more concrete actions. Given that the literature shows that institutional

investors may affect managerial decision making, as well as that managers may alter

disclosure tone to achieve certain goals, we expect that dynamics regarding

institutional investors and disclosure tone may exist.

We present a holistic consideration of the dynamics between institutional

investor holdings and conference call tone, and begin by considering the general

relation between institutional investor holdings and conference call tone to document

the net effect. We next partition our sample to consider our results across institutional

investor type, conference call section, and speaker within the call. In this analysis, we

consider regressions based on indexed firms and indexing investors to discern causality

with respect to ownership and tone. Furthermore, we consider specific contexts in

which we expect the incentive for managers to inflate conference call tone to be the

strongest. These contexts provide a setting in which the opportunity for institutional

investors to either monitor managers or exacerbate manager opportunism exists. Given

our results, we further explore trading dynamics for both institutional investors and

insiders surrounding the conference call, as well as the market response to conference

call tone, all in the context of institutional holdings.

In the context of institutional investor type, we consider that institutional

investors may have varying preferences with respect to disclosure tone dependent on

investor objective and time frame. Many studies have shown that various institutional

investors may have alternative preferences (cf. Bushee 1998, 2001). Consequently, we

expect the impact of institutional investors on disclosure tone to depend on the

institution. We expect short‐term or transient institutions to prefer increased disclosure

tone to allow a profit opportunity. Alternatively, long‐term institutions may prefer

managers to adopt a more neutral tone with respect to disclosure.

We also consider different sections within the conference call, as well as the

source of the given statements within the conference call transcript.

1

With respect to

the sections of the conference call, Matsumoto, Pronk, and Roelofsen (2011) and Price

et al. (2012) document that market reaction to conference calls varies across the

introduction and discussion sections. Therefore, we partition conference call transcripts

into introductory and question and answer sections, and separately analyze tone and

institutional ownership. Furthermore, Brockman, Li, and Price (2015) and Borochin

et al. (2018) consider and document differences in statements made by managers

relative to analysts in the conference call. Therefore, we also partition conference call

transcripts based on statements made by executives versus statements made by

analysts. As such, our results document the rich dynamics of institutional investors on

conference call tone across the various sections of the call, as well as the source of the

statements.

Subsequently, we consider specific contexts in which the relation between

institutional investors and tone may vary. First, we consider the potential opportunism

of short‐term investors and hypothesize that short‐term investors may view the

conference call as an opportunity to liquidate shares at an inflated price. This effect

1

We thank an anonymous referee for the insight to consider both speaker and conference call section.

7Earnings Conference Calls