Companies Play Favorites to Hide Bad News
Corporate executives selectively choose which analysts they interact with during conference calls to avoid unwanted questions. This “casting” of calls happens when there is potentially bad news a company does not want highlighted, according to Harvard researchers.
The researchers reviewed more than 69,000 transcripts for conference calls held between 2003 and 2011. On average, 4.26 analysts were allowed to ask questions during a typical quarterly earnings call out of the 11.45 analysts covering a stock. Though brokerage ratings tend to be overly positive, the analysts who were allowed to speak had more bullish ratings on the stock than those who were not allowed to speak.
Three primary variables played a significant role in determining how casted a conference call was. Companies with unusually high levels of accruals were 25% more likely to call upon only those analysts issuing the most optimistic ratings. Companies that either met earnings expectations or topped earnings estimates by just a penny per share were 23% more likely to cast their calls. Planned insider selling was the third variable. Executives who were intending to sell their shares were 40% more likely to take questions only from analysts issuing favorable recommendations.
Two other characteristics were also identified. Companies with more analyst coverage and a higher proportion of institutional ownership tended to cast their conference calls significantly less. Conversely, companies with more volatile stocks were more likely to cast their calls.
Being more selective about which analysts can speak on a conference call gives a company a few advantages. It prevents executives from being faced with tough questions. It reduces the chance of the company’s accounting practices or reported numbers from being publicly scrutinized and questioned. It also allows for bad news to be downplayed or to be kept out of the public eye.
The casting of calls is not a continuous event, however. Rather, companies tend to cast conference calls for just one quarter. This suggests, according to the researchers, “that casting is something a wide range of firms engage in selectively at precisely those times they have strong incentives to do so, and is not a behavior concentrated in a few firms that continuously cast their calls.” Because the practice is temporary, often the bad news comes out when the next quarter’s earnings are released.
Source: “Playing the Favorites: How Firms Prevent the Revelation of Bad News,” by Lauren Cohen, Dong Lou and Christopher Malloy, Harvard Business School Working Paper, September 4, 2013.