Winning Investors Over. Baruch Lev
related to managers' compensation, were sometimes left unanswered); (2) quantity—the total number of figures (quantities) relative to the number of words (narrative) in the presentation and the Q&A sections; and (3) content and tone—examined by automated linguistic algorithms based on various established and self-constructed “dictionaries.” To differentiate between effective and ineffective calls, we compared the one-third of the calls with the largest stock price increase during and after the call—obviously effective calls—to the one-third of the calls with the largest price decrease—ineffective (or adverse) calls. Similarly, we compared high-buzz calls—generating a large volume of trade—with low-buzz calls. (Recall that all our conference calls came in the wake of a disappointing quarter.) Our main findings and managerial lessons are:
Effective (buzz-creating and price-increasing) calls have substantially more analysts participating, more questions asked, and more responses given (several executives chiming in), as well as managers' lengthier discussion and responses, than ineffective calls.Lesson: To enhance call effectiveness, encourage wide participation by analysts and investors in the call by extensively publicizing it and by being responsive to questions. Foster a lively Q&A session by providing new information and original insights on the business. Notwithstanding frequent advice from legal council, don't be overly cryptic or bland in your presentation and answers. Focus on providing useful information, rather than on avoiding lawsuits. A defensive stance may sometimes work in boxing, but not in conference calls.
Effective calls are characterized by more quantitative responses (a higher ratio of numbers to total words) and by fewer big-picture words (like growth, strategy, or reputation) that many CEOs favor. Also, in effective calls, managers spend less time on discussion of competitive position and pricing issues than in ineffective calls.Lesson: Stick to the facts and don't blather. In conference calls, forget the concepts and models you learned in MBA strategy and leadership classes. Most analysts skipped these classes anyway.
Interestingly, buzz-creating calls (high volume of trade) contain more negative words (like abandon or abolish)—recall, all these calls follow a disappointing quarter—and less reassuring, buoyant expressions than less-effective calls.30Lesson: Honesty and specificity in face of adversity are more informative and credible than vagueness using big-picture words and sugarcoating with a positive tone. This makes sense, yet is often overlooked by executives under duress.
Finally, effective buzz-creating calls contain more forward-looking quantitative guidance, not flights of fancy, than low-buzz calls.Lesson: Hard, forward-looking information (unlike “we look forward to the many opportunities that lie ahead”) is central to an effective conference call. With the legal protection (safe harbor) given to such information, why decline to provide it?31
In summary, two major themes emerge from our analysis of effective conference calls: both the setting of the call and its tone matter. Wide participation by analysts (number of analysts as well as number of questions) and hard information—data, guidance, and less discussion of big issues or the economy at large—are the main determinants of call effectiveness. Honesty and negative expressions when called for trump obfuscation, here, as elsewhere.
Other Communication Channels
When investors attend shareholder meetings, read quarterly or annual reports, or participate in initial public offering (IPO) road shows, do they pay attention to the soft information imparted and to its tone, or just focus on the numbers? Is the narrative accompanying quantitative information cheap talk or does it convey a meaningful message?32 The latter, say Elizabeth Demers and Clara Vega, based on a study of twenty thousand quarterly earnings announcements made from 1998 to 2006, using linguistic algorithms.33 The researchers focus on two tone dimensions of the narrative: optimism (words of praise, satisfaction, inspiration) versus pessimism (blame, hardship, denial), and certainty expressions (tenacity, insistence) versus wavering (ambivalence, self-reference, variety). The results are instructive.
An optimistic managerial tone in earnings announcements positively affects investors' reaction (the stock price change around the announcement date) beyond the impact of the hard numbers.34 And this contagious effect of optimism is greater for high-tech firms, whose complex operations are not fully captured by a single number of earnings or sales, and companies with a lower quality of earnings (having large one-time and transitory items).35 Furthermore, the stock price impact of optimism is higher, the larger the number of analysts following the company and the more extensive the media coverage of the earnings announcement.Lesson: Don't hesitate to sound optimistic when warranted, particularly when the hard data like earnings or sales don't fully capture your company's performance and potential, as when earnings are depressed by large, yet promising R&D or brand-enhancing expenditures. This is important because lawyers frequently caution managers that optimism enhances exposure to litigation. Yet optimism has its rewards, as documented by Demers and Vega (optimistic persons also live longer, say researchers). But beware of baseless hype, which definitely attracts litigation. Optimism is based on facts and positive documented developments, such as a new major contract, a recent sales pickup, or a successful drug test, whereas hype is an empty ballyhoo. Recall that financial analysts and reporters will verify your optimism later on against subsequent developments, enabling them to distinguish optimism from hype.
Demers and Vega also report that a wavering, ambivalent tone (frequent use of maybe, approximately, uncertainty) is contagious too; it increases the volatility of the stock price, a reflection of investors' uncertainty.Lesson: Shielding yourself with vagueness and equivocation, which so often characterizes managerial communications, exacts a price in increased investor uncertainty and likely lower stock prices.36
Meet the Relatives: Investor Relations
On a flight to London a few years back, as I pretended to be engrossed in a book, my neighbor asked about the purpose of my trip. Giving a talk at an investor relations (IR) conference, I said, to which my neighbor, who turned out to be a CEO, responded, “We have superb IR people. They organize our press conferences and road shows well, book great hotels, and are effective gatekeepers against pestering investors and analysts.” My next-day audience was, understandably, less than thrilled to hear the CEO's “praise” of their functions. Like Rodney Dangerfield, they believe they deserve more respect. Since most medium-size and large companies have in-house IR departments, and many small firms engage IR consultants, managers would surely like to know if there is more to the IR function than the facilitation of executives' communication with investors.37 Is IR more than a glorified PR? Should we invest more in IR, upgrade its personnel, or keep it a bare-bones function? There is only scant systematic research on these important questions, but here is what we know.
IR activities are mostly aimed at enhancing the company's visibility and management's credibility in capital markets and the economic community at large: familiarizing investors with the company, its operations, performance and growth potential; targeting the desired investor base (e.g., institutional investors, sovereign funds); and attracting financial analysts to cover the company.38 Due to investors' limited attention (discussed earlier), company visibility and familiarity count a lot in capital markets. How else to explain the pervasive phenomenon known as “home bias”—the widely documented tendency of investors worldwide to invest mostly in the familiar domestic equities or in companies headquartered locally, despite the demonstrated benefits of international diversification.39 Enhancing companies' visibility, particularly of medium-size and small companies, often translates to increased demand for their securities. Wide visibility, large institutional holding, and a significant following of analysts—all objectives of investor relations—come in handy when managers issue stocks or bonds, acquire companies, or ward off activist investors and hostile acquirers. So, does IR effectively enhance a company's visibility and analysts' following, and what are the consequences of wide visibility? Brian Bushee and Gregory Miller in a comprehensive study of IR effectiveness provide interesting insights.40
Based on interviews with IR professionals, the researchers found that companies seek IR help primarily when managers believe the firm's shares