Title: Detecting Deceptive Discussions in Conference Calls
Authors: David F. Larcker and Anastasia A. Zakolyukina (both affiliated with Stanford University)
Publisher: Rock Center for Corporate Governance, Working Paper Series No. 83
Date Published: July 2010
How can employees tell if their CEO is fibbing? According to this paper, they should listen closely to their leader’s choice of words and speech patterns during quarterly earnings calls. The authors examined the transcripts of almost 30,000 corporate conference calls held between 2003 and 2007, focusing particularly on the spontaneous discussions in question-and-answer sessions with CEOs and CFOs. The researchers then matched these transcripts to a database showing which quarterly reports were subsequently restated between 2003 and 09, focusing specifically on serious cases such as a substantial restatement of net income, the disclosure of a material weakness, the change of an auditor, or a late filing, among other things. Once the authors knew which firms had significant restatements, they were able to identify which executives used ambiguous language in the original quarterly conference call to disguise a troubling problem with internal controls over financial reporting.
The researchers, who drew on psychology literature that shows people speak differently when they are lying, found that deceptive CEOs and CFOs used more inclusive general references in their speech, employing phrases like “as you know” or “everybody would agree,” to distance themselves from their deceitful statements. They also used more extreme positive emotions, preferring to label something “fantastic” instead of “good,” in an effort to sound more persuasive. Deceptive bosses also made fewer references to shareholders or to the value of the company; this might be an effort to avoid lawsuits should their dishonesty come to light, the authors proposed. Fibbing CEOs also used significantly fewer self-references, instead employing more third-person and impersonal pronouns. They also hesitated less and didn’t use “um” and “er” as often, indicating their deception had been thought about — or even coached — ahead of time. And, in a nod to former Enron chief Jeff Skilling’s infamous (and profane) dismissal of a skeptical analyst during an April 2001 earnings call, the authors found that deceptive bosses did indeed swear more often.
Based on these findings, the authors argue that although financial reports and studies of past performance are important measures for analysts and investors to examine when evaluating a company, they should also begin paying more attention to the linguistic clues in earnings calls.
Quarterly earnings calls provide unique linguistic clues to the deceptive behavior of bosses. When supervisors are lying, they tend to use more general terms and swear words, as well as fewer first-person references, and they don’t hesitate as much in their responses.