Listen to Company Conference Calls with Scepticism .. or Better Yet ... Avoid Them

In the course of a recent visit to the web site of the Association of American Investors, I encountered a paper entitled, Playing Favorites: How Firms Prevent the Revelation of Bad News. 

Here's the synopsis:

We explore a subtle but important mechanism through which firms manipulate their information environments. We show that firms control information flow to the market through their specific organization and choreographing of earnings conference calls. Firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 101 basis points per month. Further, firms that cast their calls have higher accruals leading up to call, barely exceed/meet earnings forecasts on the call that they cast, and in the

quarter directly following their casting tend to issue equity and have significantly more insider selling.

Click on this link to access the entire document: 

http://www.hbs.edu/faculty/Publication%20Files/14-021_d63679f9-4437-48b6-9073-ed41ba2ef9f5.pdf

When I started to listen to conference calls (which I do not do now), I was somewhat surprised by the friendly atmosphere and the rather lame questions from the assorted analysts. As one who has experienced rigorous programme audits, I had the expectation that quarterly conference calls would involve an equivalent degree of discipline and accountability.  Not so - better to wade through financial reports and, perhaps, message boards, which sometimes are not shy to reveal a company's warts and transgressions, especially shareholder unfriendly acts on the part of company executives.