August 25, 2021 | 4-minute read (729 words)
In a bid to avoid uncomfortable topics, executives may go off-topic or even resort to dishonesty during corporate earnings calls. And it’s not uncommon for them to dodge questions from business reporters and equity analysts with nonanswers such as “We don’t disclose those numbers'' or “I don’t know.”
Lacking meaningful information, these vague answers by corporate managers may be frustrating to analysts seeking hard data, but they’re also fairly common.
According to research published May 21, 2021, in the Journal of Accounting Research, 11% of analysts’ questions during earning calls elicit similarly noncommittal replies, regardless of industry.
Take Delta Airlines’ co-CFO Gary Chase’s response to a reporter’s question in January 2021. When asked for an update on the number of people banned by the carrier for noncompliance with mask policies, he cited a rough figure: “North of 800 at this point.” When the journalist probed further and asked how many of those bans happened in the previous week, Gary chose an equally evasive response, stating, “A number. Not a huge number, but a number.”
Or take the reply of Monster Beverage CEO Rodney Sacks during a call in May 2020. When asked by a business analyst to comment on PepsiCo’s emergence as a new energy drink competitor, Rodney dodged the question by giving this vague response: “I think that the short term will be disruptive, and we’ve got plans for both the short term and the long term.” Adding to the confusion, he continued with more noninformation, saying, “I think it will be inappropriate for us to disclose what those plans are. But rest assured, we do have plans.”
In both instances, the CEO gave indirect responses which are as good as no answer for analysts. This begs the questions of what, if anything, these executives’ non-answers convey, whether they are deliberately being evasive and if they tend to avoid certain categories of questions.
Stanford Graduate School of Business professor of accounting David F. Larcker and his team zeroed in executives’ non-answers on corporate earnings calls and came up with an interesting study.
The researchers used linguistic analyses and machine learning to analyze roughly 1,800 responses of executives from publicly listed U.S. companies in corporate earnings calls between 2003 and 2016.
Executives’ non-answers were grouped into three broad categories:
They generated an algorithm for non-answers that enabled them to examine the disclosure choice within each call. Using the measure, they evaluated the questions posed by analysts for attributes such as complexity and tone of word choice.
- Unable: “I don’t have that information right now.”
- Refuse: “We do not disclose those numbers.”
- After-call: “Let’s take that discussion offline.
For example, take this question, “You haven’t had much success in R&D, can you tell us what’s going on there?” This exposes the firm’s failures and executives are more likely to respond vaguely.
- Questions comprising words with a negative ton and those imbued with more uncertainty and greater complexity are more likely to trigger non-answers.
For example, see the Monster CEO’s refusal to disclose how he would combat the threat of competition from PepsiCo.
The research algorithm has one limitation in that it lacks the ability to detect every single non-answer. It cannot discern interruptions as non-answers. And when an executive replies to a question with something totally unrelated, the algorithm can’t identify it for a non-answer. Nonetheless, the findings are still revealing.
- Questions seeking more detail tend to yield empty answers from managers.
- Performance-related questions tend to be associated with executives’ non-answers, with the association being stronger when performance news is not favorable.
- Questions about a company’s proprietary information are associated with non-answers, and this association is stronger when competition is fierce. The presumed reason is that revealing a new marketing or distribution strategy before it’s been rolled out would give competitors a leg up.
While it’s likely not feasible to glean clear-cut answers on some matters pertaining to a company’s performance or proprietary information from executives, rephrasing questions could make conference calls more productive for analysts.
Framing questions as short and succinct, delivered with a positive tone can help business reporters and analysts garner better information from executives. And if not, at least reduce their odds of yielding non-answers.