Because CEOs are likely to take responsibility for setting the tone of a conference call, the authors also tested whether CEOs spoke and acted differently than other managers. They found that CEOs had the widest disconnect between the tone they expressed and the trading they did later.
Analyzing the firms in the sample according to size, the authors showed that there was a much stronger inverse relationship between call tone and trading activity at smaller firms, where executives can more easily influence stock price valuations because their companies are not followed as closely by outsiders. “Such firms have fewer analysts following their performance, less institutional ownership and monitoring, and little if any media coverage during the earnings season,” the authors add.
The “striking” results, they note, aren’t driven by a simple contrarian trading strategy. For example, if the company’s stock has slumped in the months before the conference call, leading the CEO to think the firm is undervalued, it’s not surprising that the CEO would be a net buyer subsequently. But it would be very surprising for that same CEO, believing the firm’s stock to be a bargain buy, to use a downbeat tone during the conference call.
Managers do not put their money where their mouths are, according to this paper. When top executives strike a positive tone in conference calls, they are more likely to sell their own shares in the subsequent months. And when they express a downbeat outlook, they tend to buy more stock.