It’s earnings season and corporate finance pros everywhere are gearing up for the quarterly Super Bowl, i.e. the earnings call. Having been in place for several decades, the format is painfully familiar – last minute fire drills, carefully scripted language and even more select (and scripted) Q&A. Yet, quarterly earnings and resultant analyst calls are a perennial hot topic.
Many analysts and reporters hate these calls, and frankly, I don’t know many CFOs and CEOs who like them very much either. When it comes to explaining the complexities of performance to critical ears, companies understandably prefer to take a more conservative approach with only vetted information and statements making the cut.
However, the problem is bigger than just putting Wall Street analysts into a conference call coma once a quarter. In fact, it turns out there may be an actual financial downside to presenting information that’s overly scripted – particularly during the Q&A portion of the call. Joshua Lee, assistant professor at Florida State University, found in a study that companies who respond to questions with highly scripted responses tend to experience share price declines on the day of and 90 days following their quarterly call.
The reason, apparently, is that when analysts hear obviously scripted responses to questions about results, they grow concerned that company executives may be uncomfortable sharing that information, and may even be hiding potential problems that could lead to diminished performance down the line. The study found that those listening to calls can instinctively detect canned responses from extemporaneous ones and they react much more positively to the latter. In other words, when analysts hear a response that sounds like legal boilerplate, they see a red flag.
Some companies are waking up the investment community by shaking up the quarterly call. For example, LinkedIn presents its information in a series of slides, and Netflix sends financials in advance in order to purposely leave more time for meaningful Q&A. Neither use the quarterly calls to reiterate overly scripted content. Netflix even takes questions via email and Twitter and LinkedIn uses a series of visualizations to show the story behind their numbers.
Both businesses show how applying modern methods to an age-old practice can improve engagement and understanding of complex performance analysis.