How complicated and long-winded corporate jargon can predict stock falls

  • Researchers found that earnings calls which use complex industry jargon tend to predict stock declines.
  • Earnings calls which feature short, monosyllabic words are associated with positive results.
  • “Natural language processing” could use that information to predict stock movements.

LONDON — Earnings calls have long been criticised for their use of corporate jargon and insider gobbledygook, but researchers now believe it contains valuable trading information.

Research from S&P Global Market Intelligence cited by the Financial Times has found that earnings calls featuring long-winded, polysyllabic language tend to come before a fall.

The FT cites the example of an second-quarter earnings call in April from the head of US software firm Seagate Technology. Stephen Luzco told analysts:

“I think from our perspective, we’ve always viewed this business as attractive in terms of its core business of selling into OEMs as well as servicing cloud service providers at one level, but really the opportunity to, I think, as architectures evolve and different customer needs evolve, to have the capability to optimise the devices either at the device level, at the subsystem level or the systems level, and if you do not have the software capability to do that, you really cannot take advantage of what we think would be a potentially significant long-term trend.”

Following the call — which featured some of the most convoluted language of all S&P 500 earnings calls that quarter — Seagate’s stock plummeted by 17%.

“When people have good news, they tend to say it directly. When they have bad news, they tend to dance around it,” S&P’s David Pope told the FT.

S&P’s research forms part of the growing field of “natural language processing,” a discipline which applies machine analysis to human language, and which investors believe could prove incredibly valuable.

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