Executive cues of organizational virtue and market performance: Creating value during times of earnings uncertainty

• Published date: 01 June 2021
• Author: Vivien E. Jancenelle
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/basr.12235

ORIGINAL ARTICLE

Executive cues of organizational virtue and

market performance: Creating value during

times of earnings uncertainty

Vivien E. Jancenelle

College of Business Administration,

Texas A&M University - Central Texas,

Killeen, Texas, USA

Correspondence

Vivien E. Jancenelle, Assistant Professor

of Strategic Management, College of

Business Administration, Texas A&M

University - Central Texas, 1001

Leadership Pl, Killeen, TX 76549, USA.

Email: vjancenelle@tamuct.edu

Abstract

This study investigates whether cues of organizational

virtue (conscientiousness, courage, empathy, integrity,

warmth, and zeal) sent by top managers can create

market value in the context of post-earnings announce-

ment conference calls and earnings uncertainty. We

contend that executive cues of organizational virtue

embedded within earnings conference calls can miti-

gate shareholders' reactions to earnings surprises and

use textual analysis to test for the effect of organiza-

tional virtue cues on market performance in a longitu-

dinal sample of 1920 firm-quarter observations. The

results suggest that cues of conscientiousness, courage,

and zeal are capable of adding back firm value after the

posting of earnings surprises, while empathy worsens

the market's reaction to earnings surprises. Integrity

and warmth were not found to have an effect.

KEYWORDS

market performance, organizational virtue, top management

teams

1|INTRODUCTION

Investors tend to be particularly sensitive to earnings uncertainty and firms that post earnings-

per-share (EPS) figures that differ from analysts' consensus by just a few cents can suffer large

losses in market value in a single trading day (Skinner & Sloan, 2002). Unexpected changes in

Received: 3 February 2020 Accepted: 11 April 2021

DOI: 10.1111/basr.12235

© 2021 W. Michael Hoffman Center for Business Ethics at Bentley University

Bus Soc Rev. 2021;126:193–209. wileyonlinelibrary.com/journal/basr 193

earnings (i.e., earnings surprises) are typically not welcomed by shareholders, as they tend to be

representative of greater firm-specific uncertainty (Chatterjee et al., 1999). Earnings surprises

are indicative of a market's inability to predict earnings and that predictive inability is likely a

consequence of the information asymmetry that exists between managers and shareholders

(Chaney & Lewis, 1995). As a result of shareholders' preference for smooth earnings, firms that

make their earnings predictable and avoid posting unexpected earnings surprises are typically

granted higher valuations by market participants (Ajayi & Mehidian, 1994).

Post-earnings announcement conference calls have received heightened scrutiny in recent

years, partly due to technological advances that have made them available and easily accessi-

ble to retail investors for live and on-demand listening, through online applications such as

ChorusCall,EarningsCast,orInvestorNetwork. As a result of their increased visibility by mar-

ket participants, conference calls have become a widely used tool for corporate disclosure.

Indeed, it is estimated that nearly 99% of U.S. publicly traded corporations now hold them

(National Investor Relations Institute [NIRI], 2016). Earnings conference calls typically imme-

diately follow the release of a firm's earnings figures and are known to be informative to

investors (Frankel et al., 1999). Prior research has suggested that conference call discussions

initiate changes in market value beyond those initially triggered by a firm's earnings release

(Bushee et al., 2003). As such, they are often seen as a key tool capable of reducing informa-

tion asymmetry between shareholders and managers (Kimbrough, 2005), and prior research

has often relied on signaling theory to identify cues capable of reducing information asymme-

try, such as cues of positive psychological capital (Jancenelle, 2018) or emotional tone (Blau

et al., 2015).

While prior studies have often relied on conceptual lenses emerging from the fields of

finance, accounting, and economics—such as the useful incremental information perspective

(Jancenelle, 2018; Merkl-Davies & Brennan, 2007)—to study the effect of managerial cues

during earnings conference calls, extant literature does not appear to have considered the

influence of organizational ethical behavior. Yet, concepts from the field of business ethics,

such as the role played by organizational virtue ethics, may offer unique insights on market

value creation following earnings uncertainty. Indeed, organizational virtues possess strategic

value which may be useful in the context of earnings uncertainty, as they are indicative of

the ethical character of an organization (Chun, 2005) and are built on accumulated experi-

ence from everyday business life (Chismar, 2001). As such, organizational virtues are often

considered to be of high strategic value, since they are unique to each organization and may

set firms apart from their rivals and serve as a unique source of competitive advantage

(Chun, 2005).

We fill this gap in the literature by studying the role played by organizational virtue ethics

in the context of earnings uncertainty and earnings conference calls. Specifically, we use the

multidimensional construct of organizational virtue, a construct known to guide the ethical

character and virtue behavior of a firm (Chun, 2005) and composed of six dimensions: conscien-

tiousness, courage, empathy, integrity, warmth, and zeal. The context of earnings conference

calls—which feature the management team and not just the CEO—is particularly well suited to

the study of organizational virtues, as such virtues are known to be collectively shared by orga-

nizational members (Chun, 2005). Further, organizational virtues have been purported to

improve a firm's ability communicate with the market, particularly as it relates to better com-

municating performance expectations (Strong et al., 2001).

In this investigation, we are concerned with whether executive cues of organizational virtue

sent during earnings conference calls can mitigate shareholders' reactions to earnings surprises.

194 JANCENELLE