CEOs who mention ‘growth’ on earnings calls see outsized stock gains


If you’re a CEO hoping to give your stock a boost over time, you may want to start mentioning “growth” and “expansion” more often on earnings calls.

Shares of companies with chief executives who made liberal use of positive words to describe financials during earnings conference calls outperformed those at businesses with more reserved CEOs, sometimes by as much as 9% per year, S&P Global Market Intelligence found in a new study.

“Historically, firms whose executives referenced the most instances of i) revenue- ii) earnings- or iii) profitability-related topics in a directionally positive light outperformed their most extreme counterparts,” S&P’s Frank Zhao wrote in January.

S&P’s Quantamental Research team used proprietary text analytics technology to gauge the tone, complexity, frequency of mentions, and transparency of more than 2,400 companies’ earnings call transcripts from January 2008 through December 2017.

They then compared the performance of long-short stock portfolios based on how frequently management used positive descriptors to characterize earnings results.

Zhao and his team found that stocks of companies with CEOs who most often used buoyant vocabulary to describe revenue, earnings or profitability outperformed a long-short portfolio of stocks whose CEOs were the least apt to use gilded vocabulary by 9.16%, 8.6% and 6.76%, respectively, per year.

The stock of Russell 3000 companies with vocally optimistic CEOs between May 2010 and December 2017 also outperformed the stock market by 4.2%, 5% and 3.6%, respectively, depending on which financial metrics (revenue, earnings, and profitability) management discussed.

That analysis also revealed that company executives who introduce numerical values earlier in the call bested peers by 4% while those with management teams that avoid blaming external circumstances on their results outperformed their peers by approximately 2%, the study showed.

“Individual stock returns tend to be dominated by company-specific news and events and they tend to be very, very noisy: Apple, Tesla and so on, so forth,” Zhao said a separate interview with CNBC.

The S&P study represents the latest in a series of research projections conducted by Zhao, who for months and across multiple papers used advanced language processing to try to derive insights from nontraditional, qualitative data sources such as speech.

“What we have done here, in order to isolate the returns and be able to attribute the returns due to one of these NLP signals with a higher degree of confidence, [is] look at stocks in a portfolio of stocks” to mitigate such company-specific noise, he added.

Of course, it isn’t crazy to assume that management teams that mention “growth” and “expansion” may be in a better position to do so. That is to say, their company’s financial performance in recent quarters may simply be healthy and therefore deserving of praise.

But perhaps of greater interest, Zhao and his team found that firms whose executives referenced the most instances of guidance or used the most similar language between calls outperformed counterparts by 5.84% and 3.75% per year, respectively.

That makes intuitive sense, said Zhao, as executives may be more willing to talk about guidance when they have a higher degree of confidence and visibility into future performance even without tangible proof of that expected success. That’s why opinions on the perceived value of a CEO explaining company performance and forecasts range from investor to investor.

Some, like Berkshire Hathaway’s Warren Buffett, say that while mandated annual and quarterly reports provide important insights, of far less value is a CEO’s guess as to how the business will perform over the next 12 months.

“I like to read quarterly reports as an investor,” Buffett told CNBC in 2018. “I like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I’ve seen it lead to a lot of bad things.”

Central to Buffett’s criticism is the belief that executives who know their opinions can impact stock prices can (even inadvertently) juice the value of their equity with rosy outlooks.

That criticism is echoed by JPMorgan Chase CEO Jamie Dimon, who’s argued that setting earnings or sales targets months in advance can influence the way management teams prioritize business decisions and potentially put meeting quarterly guidance goals before the long-term financial health of the company.

Executives often feel pressure to make quarterly forecasts, but “it can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon told CNBC.

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