Does an Analyst's Access to Information Vary with the Favorableness of Their Language When Speaking to Management?

Abstract

SYNOPSIS We examine whether analysts who use more favorable language during earnings conference calls subsequently issue more accurate earnings forecasts. Using a large sample of earnings conference calls from the 2004–2013 period for S&P 500 firms, we find a significantly positive relation between an analyst's tone during a firm's call and the accuracy of the analyst's next quarterly earnings forecast for that firm. We find a similar relation for analysts who praise a firm's management during the call. Our findings are consistent with the favorableness of an analyst's language reflecting their access to a firm's management. In additional analyses, we find that female analysts, analysts with less general experience, analysts at smaller brokerage firms, and analysts who cover more industries, on average, use significantly more favorable language during earnings conference calls. Overall, we contribute a new proxy, incremental to other proxies, for the analyst-manager relationship.

Does the Textual Tone of Analyst Reports Have Valuable Information? Korean Evidence*

“…Existing literature about textual content and stock market reaction investigates texts produced either internally or externally by the company. Internally generated data encompass the information content of the corporate disclosures, such as annual reports (Tetlock 2007;Loughran and McDonald 2011) or conference call scripts (Price et al 2012;Blau et al 2015;Brockman et al 2017;Milian et al 2017). Externally generated data encompass user-generated content from the internet, such as internet message boards or social media (Antweiler and Frank 2004;Das and Chen 2007;Bollen et al 2011), as well as expert analysis data, such as analyst report texts (Huang et al 2014;Liang et al 2022) or financial news articles (Schumaker and Chen 2009;Schumaker et al 2012).…”

“…2017; Milian et al . 2017). Externally generated data encompass user‐generated content from the internet, such as internet message boards or social media (Antweiler and Frank 2004; Das and Chen 2007; Bollen et al .…”

The effect of social skills on analyst performance

“…Panel B of Table 3 shows that Social_Skills is positively associated with management access during earnings conference calls. Given that prior studies find the relationship between analysts and managers is significantly associated with forecast accuracy (Mayew et al, 2013;Milian et al, 2017), a natural question is whether the effects of social skills are incremental to specific analyst-manager relationships in a form other than Alumni_Ties. To answer this question, we additionally control for the number of conference calls attended by an analyst during the company-year in Equations ( 3) to ( 5).…”

“…Next, we evaluate the predictive validity of the Social_Skills measure, which is another facet of construct validity, using the earnings conference call setting (Mayew, 2008; Mayew et al, 2013; Milian et al, 2017). Because social skills help individuals to establish relationships and interact effectively with others, we expect that analysts with better social skills maintain good relationships with the covered companies’ management and, therefore, have better management access during conference calls.…”

“…In addition, their brokerage firms tend to have a higher demand for social skills, proxied by the percentage of financial analyst job postings that require social skills. Second, as an evaluation of the predictive validity of our measure, we use the earnings conference call setting to examine whether analysts with better social skills have better management access (Mayew, 2008; Mayew et al, 2013; Milian et al, 2017). Consistent with analysts with better social skills having better relationships with the management of covered companies, we find that these analysts are treated more favorably by managers during earnings conference calls.…”