What CEOs get wrong on earnings calls

CEOs and other top executives influence the lives of countless individuals — employees, shareholders, customers — but how do they navigate the complex problems they face in their positions? How do they decide which risks are worth taking? How do they balance competing interests? When there is unexpected financial loss or operational disruption, should they trust their intuition or take a more analytical approach to finding a solution? Finally, when they do arrive at a decision, how do they communicate that decision with employees, shareholders or customers?

Such questions have fascinated Michael Mannor throughout his career.

Mike Mannor

As the John F. O’Shaughnessy Associate Professor of Strategic Leadership at the Mendoza College of Business at Notre Dame, Mannor has been exploring managerial cognition and the psychological processes that shape strategic attention through a series of papers co-authored by John Eklund of the University of Southern California. Previously, Mannor and Eklund explored how CEOs should direct their attention, demonstrating that decisive focus is a superior firm strategy to pursuing broad ambition. Now, they’re asking how the market responds when executives communicate their strategies.

In “Curious and analytical: How analysts evaluate and respond to executive communications about firm strategy,” published in Strategic Management Journal, Mannor and Eklund probe how securities analysts react when CEOs share bold, new strategies during earnings calls.

“We had a few different things that we were trying to do in this paper. One was to look at whether anyone cares when executives talk about strategy. Do markets react to the content of that information?” said Mannor. “We knew from previous literature that there is a positive relationship: Markets like to get more information. But we didn’t really know how analysts interpret the specifics of the strategies being communicated.”

Securities analysts shape market perception by reporting on public firms, evaluating their performance and forecasting critical outcomes to ultimately influence stock prices. To test how analysts might respond when CEOs share new strategies, the authors drew on the “expectation violation theory,” which describes how people respond to communication based on previous experiences and expectations.

They posited that analysts would not react uniformly to the same information when communicated by different firms, given that expectations of firms and their leaders would differ across organizations. What they didn’t know was whether details about a firm’s strategy would affect such expectations or what their subsequent reactions would be.

“There has been mixed literature on analysts and how attentive they are,” explained Mannor. “Some of the criticism is that they are like lemmings — they just march in a row looking at other analysts and follow the leader.”

Mannor was doubtful of this characterization but eager to contribute to the sparse literature on how analysts think and process information.

For their analysis, he and Eklund collected more than 18,000 transcripts from quarterly earnings calls made between 2008 and 2023 from a sample of 440 S&P 500 companies. They classified the language used by managers during the calls into 13 categories and then mapped these categories onto “growth” and “maintenance” strategies based on a survey of strategy scholars.

To gauge how analysts reacted to information during the calls, they assessed their language in the transcripts, measuring the frequency of words used to express curiosity and analytical thinking based on a previously developed and validated language measure. They captured how analysts then evaluated companies directly after earnings calls by pulling the first stock ratings issued by the Institutional Brokers’ Estimate System (I/B/E/S) following the quarterly calls.

“The big takeaway is that when CEOs talk about firm strategy, the markets adjust,” said Mannor. “Analysts start asking different questions. We show that they’re actually quite sophisticated in their consumption of information from the company, and they use that information to inform their work.”

They found that when executives mention growth strategies during earnings calls, analysts’ curiosity is piqued. They ask more questions and they ask for more follow-up details. Along with becoming more curious, they become more analytical and they adjust their ratings and forecasts for the firms.

Having initially rejected the idea that analysts are “lemmings,” Mannor wasn’t particularly surprised by this outcome, and it more or less hewed closely to what he and Eklund hypothesized. However, the paper also reveals something that wasn’t so clear from the outset: All of this is subject to expectations.

“Analysts are very attentive to what executives talk about when they talk about strategy, but the twist is that they are looking at it through an expectations lens,” he said. “If what a CEO talks about is consistent with what an analyst expects from them, then that’s a positive thing. But if it violates those expectations, then that’s going to be a challenge.”

For example, analysts tend to react positively when executives bring up growth initiatives. However, if analysts view a company as a high-dividend firm based on its previous track record, then its CEO could negatively impact the company by discussing growth.

“If the market understands you to be a dividend firm, then the way you create value for many people in the market is by staying in your lane and producing a nice dividend,” explained Mannor.

While this insight is significant in terms of academic research, its practical implications could be critical, especially when new CEOs are sometimes encouraged to talk about growth when taking over the helm of an organization. There could be swift penalties for that based on the company’s prior strategic positioning.

This doesn’t mean that companies can’t “change lanes,” as Mannor put it, but leaders should be extremely purposeful in how they communicate strategic initiatives and do so through a variety of mechanisms.

“If they want to pivot the organization, they need to be really thoughtful about how to communicate that in a systematic way in order to shift expectations,” he said. “Earnings calls are the setting in which we look at this, which is a very important way that firms interact with the marketplace and stakeholders, but they also have press releases and social media accounts. And they need to bring their employees and customers along as well.”

Mannor would like to see more research into this topic, including how CEOs might effectively change their companies’ narratives or how quickly such a transition might occur. Researchers could further drill down on types of growth or market reactions to other strategic elements, such as taking a more global posture or, conversely, re-domesticating production or sales. He also said that while this paper used analysts as an indicator of key information intermediaries for the marketplace, other studies might explore how employees, customers, regulators or industry peers react when firms communicate their strategies.

Currently, Mannor and Eklund are working on an open-data paper that will provide the raw data they compiled for this study for other researchers to analyze and integrate into their work.

“This kind of deep data about manager cognition and how the firm is communicating about different elements of their strategy and how they might process information is pretty hard to get,” he said.

As he has always done, Mannor will continue to study CEO cognition. He is particularly interested in how different executives navigate uncertainty, ranging from more tentatively to more assertively, and how markets react to these different approaches.

“That kind of situational awareness can be really helpful for researchers,” he said. “But also for CEOs who want to use the latest research to help them make better decisions.”