Stock prices react significantly to the tone (negativity of words) managers use on earnings conference calls, not merely the factual information conveyed. This reaction, though both subtle and understudied, reflects the reasonably rational use of information. “Tone surprise” is the residual when negativity in managerial tone is regressed on the firm’s recent economic performance and CEO fixed effects. While tone surprises predict future earnings, inexperienced analysts overreact (underreact) to tone surprises in presentations (answers). Experienced analysts respond appropriately. In those firms where tone surprises predict future earnings and analyst uncertainty more strongly, price movement is greatest. Post-call price drift suggests less-than-full-use of information embedded in managerial tone.
Alexander Wagner is an associate professor of finance at the University of Zurich and a faculty member of the Swiss Finance Institute. He received his PhD in Political Economy and Government from Harvard University. In his hometown of Linz, Austria, he completed studies in economics and law. Alexander Wagner’s area of expertise is in the fields of corporate finance, corporate governance, executive compensation, and behavioural economics. His research in this field has been published in leading academic journals, including the American Economic Review, the Journal of Finance and the Journal of Financial Economics. For several years he has served as an independent counsel for PricewaterhouseCoopers. He is a member of the board of trustees of SWIPRA, the Swiss proxy advisor.