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January 2, 2018

Concrete or vague? How CEOs talk can send stocks up or down

UC Riverside business professor says concrete vocabulary can build trust among analysts

Author: Richard Chang
January 2, 2018

How CEOs talk on an earnings call can make or break it for the company’s stock.

United Airlines CEO Oscar Munoz learned a lesson last October, when his company’s stock tumbled following what the news media described as a “tense” earnings call. Analysts had asked Munoz to provide details on how the legacy carrier would respond to competition from low-cost airlines, as well as higher fuel and other costs.

“I just need a little more time,” Munoz told investors, according to a transcript. “We’ve always been about proof, not promise. And so right now I’m a little bit more promising and the proof will come as we get more into the details of this.”

Munoz’s stumble isn’t unusual. When CEOs talk in less concrete terms, the stock price of their respective companies tends to suffer, according to a research study published in Strategic Management Journal by Professor Jerayr “John” Haleblian of the University of California, Riverside.

“The big takeaway was if CEOs used language that was more concrete as opposed to more abstract – the market responded more positively to the language,” said Haleblian, an associate dean and professor of management at UCR’s School of Business.

Haleblian gave two examples of statements that could come from an earnings call. The first focuses on solid figures, like “our gross profit increased by 8 percent to 20.2 million from 18.7 million because we have launched five new products and opened 52 new stores nationwide.”

The second example, “we expect to do better this year because of actions we’re taking to grow the firm,” lacks details and is flat-out vague, Haleblian said.

The study found that when a company’s misses Wall Street’s expectations, CEOs are judged more acutely on the type of language used during the call.

“If you make your numbers, you did the right thing,” Haleblian said. “If you miss it, it’s like why? If you can walk people through the why, they are more likely to develop that trust. If you are vague, (analysts) view you as evasive and bid the stock down more.”

In the case of United’s Munoz, his company had actually exceeded Wall Street’s numbers, but the stock still suffered as a result of sharp questioning from analysts on future challenges facing the Chicago-based carrier.

Haleblian’s research examined 500 firms from the S&P 1500 during the period of 2007-2013. The sample pool included more than 6,000 earnings calls. A computer program was used to parse through each transcript. The vocabulary – whether concrete or abstract – was compared to the performance of the company’s stock immediately after the call and one day later.

“Being transparent seems to pay off,” Haleblian said.

The paper was published in collaboration with researchers from Texas A&M University and Michigan State University.