Winning Investors Over. Baruch Lev

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СКАЧАТЬ Secrets of Effective Conference Calls

      The evidence is unanimous that, by and large, conference calls impart useful information to investors. Studies have documented, for example, an abnormally high volume of stock trade and price volatility during and immediately after the calls, indicating that new information was released in the calls.²⁴ Such findings aren't really surprising. Why else would analysts and investors continue to attend conference calls? The important question for managers is how to enhance the effectiveness of calls. For this, you have to actually listen and analyze the content of the calls, not just record their impact.

      Although Marshall McLuhan famously claimed that “the medium is the message,” the conference calls' narrative and tone are crucial to their impact on investors. The Children's Place conference call I described earlier disappointed investors because of largely irrelevant content—particularly managers' refusal to provide meaningful details and prospective guidelines. Two studies, using advanced linguistic-analyzing software, delved into the content of conference calls, providing important insights.

      Dawn Matsumoto, Maarten Pronk, and Erick Roelofsen analyzed over ten thousand transcripts of earnings conference calls held between 2003 and 2005, considering the two segments of the calls—the management presentation and the subsequent Q&A.²⁵ The researchers focused on the length (word count) of the call and on two content dimensions: financial (earnings, sales) versus nonfinancial (e.g., competitive position, economic outlook) information, as well as retrospective (e.g., past earnings) versus prospective (sales guidance) information.²⁶ The findings indicate that the worse the company's performance disclosed before the call, the longer the discussion will be in both segments of the calls. Either managers attempt to distract disappointed investors with hot air, and/or poor performance requires more explaining than good performance. Similarly, when performance is poor, managers' presentations are less financially oriented (more bullshit?) and more focused on the future. Not unexpectedly, in the Q&A segment of the call, which is initiated by analysts, the worse the company's performance, the more the discussion is financially oriented and focused on the past. Clearly, analysts and investors are less interested in managers' “castles in the air” and more concerned with hard, financially oriented information about the things that went wrong.

      But what exactly makes a conference call click? To answer this question, I performed (with a group of doctoral students—Karthik Balakrishnan, Richard Carrizosa, and Alina Lerman—all young professors now) an intensive content analysis of a large sample of effective versus ineffective calls. What's our definition of an effective call? One that creates a buzz and triggers an abnormally high volume of stock trade.²⁷ Better yet, a call coming in the wake of a disappointing quarter, yet results in a stock price increase during and immediately after the call. Using conference call transcripts from the Thomson StreetEvents database, we identified thousands of quarter-end calls conducted from 2001 to 2007, all following disappointing results—a miss of analysts' consensus earnings estimates. Since corporate earnings are released before the conference call, our measure of the reaction to the call—the stock price change from the start to the end of the call, or to the end of the call day—reflects the call's message rather than the disappointing earnings.²⁸ We focused on both the stock price change and the trading volume generated by the call, the latter, reflecting its buzz.²⁹

      We examined the following attributes of conference calls: (1) participation—the number of analysts participating, number of questions asked, and number of managers' answers (some questions got multiple answers; others, mainly 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 СКАЧАТЬ