What not to say on an earnings call

Socrates drew his strength from knowing what he didn’t know, but it seems corporate executives get punished by investors when they admit to not knowing something.

Three researchers from the University of Frankfurt created a machine learning programme that analysed earnings calls of S&P 500 companies for evasive answers by executives. They looked at the phrases these executives used and identified non-answers to questions by analysts. The word cloud below shows which phrases most reliably indicate a non-answer.

Non answers by executives in earnings calls

Source: Barth et al. (2022)

The famous “let me get back to you” topped the list, followed by “I am not sure” and “it is too early to tell”.

Looking at the instances when executives gave non-answers, they found that these non-answers were particularly common when the analysts ask a follow up question or ask a question with a negative tone. Non answers are also more common in response to forward looking questions.

That isn’t too surprising, because executives are naturally cautious about forward-looking statements and many of us simply don’t like critical questions. But the impression executives create by giving non-answers is one of increasing uncertainty or even evasion. And investors like nothing less than uncertainty. As a result, earnings calls where executives avoid more answers (especially when they blather on about a topic to avoid giving an answer) end with share prices taking a steeper fall. And analysts tend to provide more downgrades and fewer upgrades to a company after earnings call where executives provided more non-answers.

In essence, when executives avoid answering a question in an earnings call, they look like they don’t know what they are doing or what is going on in their business and their industry. And the market seems to pick up on that.