Discrimination on an earnings call
Spare a thought for hedge fund analysts. They constantly get bad press and when they lose money big time as in the brief moment of a GameStop short squeeze, everyone cannot hold back their pleasure at the misfortune of others. If only there was a word for it…
And now, it turns out they are actively discriminated against in earnings calls.
A study of 81,000 earnings call transcripts from US companies between 2007 and 2016 revealed that on average, buy-side analysts ask a question in only 18% of calls. Furthermore, they ask fewer and shorter questions on earnings calls, but when they ask a question, company management is more likely to engage with them and more likely to allow a follow-up question. That is, of course, if they are not working for a hedge fund. It turns out that hedge fund analysts are less likely to be called to ask a question at the beginning of an earnings call and less likely to get the opportunity to ask a follow-up question. This effect is particularly strong if there is significant short-selling in the stock. Could it be that on average, hedge fund analysts are less positive about a stock than sell-side analysts (which is what the study found) or that they express a greater uncertainty about the prospects of the company than management would like? Or could it be that sell-side analysts on average take clues from hedge fund analysts and lower their ratings ever so slightly after a buy-side analyst asked a negative question? Could it be that these analysts are more likely to hold companies accountable for their actions and that corporate executives don’t like that, so they tend not to give the proverbial microphone to these analysts? Who knows…
Average participants in an earnings call 2007-2016
Source: Call et al. (2020).