Sometimes it’s not what’s said on an earnings call that tells you how a company is doing, but who gets to talk.
Firms that “cast” their conference calls by calling disproportionally on bullish or friendly analysts do worse in the future, according to a new NBER working paper.
They experience more negative earnings surprises, and are more likely to restate earnings in the future.
The authors argue that firms engage in “casting” when they have sort of negative information to hide. They call on more favourable analysts because they’re less likely to ask probing questions or press them for more details.
The negative performance comes when that negative information leaks out.
Firms have more information than analysts and shareholders, and they will only cast when it’s to their advantage.
The authors thought of three possibilities. Firms might be managing earnings and don’t want to be probed, they might have just met or exceeded expectations (which has been shown in earlier studies to indicate a greater likelihood of earnings manipulation), or they may be about to issue equity or engage in insider sales, giving them incentive to keep the stock high.
There was evidence for each of them.
“Firms with higher discretionary accruals, firms that barely meet/exceed earnings expectations, and firms about to issue equity are all significantly more likely to cast their calls,” the authors write.
Additionally, the firms that engage in this sort of behaviour are the ones that are more likely to get away with it, those with fewer analysts and institutional owners.
Casting’s not something firms do many quarters in a row, they’d be unlikely to get away from it or see any benefit. They usually just do it once, likely when they want to hide something. This chart shows how often casting episodes last. It’s usually just one quarter:
When earnings calls are particularly friendly, it might not be because all is well, but because there’s something fishy going on.
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