When More Or Less Is Less: Managers’ Clichés

Abstract

In their communications with the public, company managers disclose internal information, sometimes unwittingly. Prior studies have documented that the tone change in earnings conference calls can help predict future excess returns. Similarly, managers who use euphemisms on earnings calls to describe negative performance (think “headwinds”) essentially convey negative information to investors, and their stock is negatively affected. This study investigates another mechanism to identify management’s hedging (or obfuscation): the use of clichés. In this article, the authors identify the most frequently used clichés in earnings calls and examine whether investors react negatively to them. They find that managers use more clichés when performance is bad, and investors correctly react negatively to clichés, even after controlling for negative earnings news and the general tone of the earnings conference call. They also find that a hedge portfolio consisting of long positions in companies that used no clichés and short positions in companies that used at least four clichés earned an average of 2% per month and had a statistically significant intercept of 40 bps monthly after controlling for the five-factor Fama–French model.

TOPICS:Security analysis and valuation, quantitative methods, factors, risk premia, performance measurement