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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Managerial Tone and Analyst Recommendations |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 46 |
| Date | 2016 |
| Abstract Text | Recent literature has investigated the relevance of managerial tone in the financial markets. A popular approach is to study the effect of tone in quarterly earnings conference calls on the stock market. It has been shown that the frequency of negative and positive word use in these conference calls can predict stock returns (Mayew and Venkatachalam (2012); Price, Doran, Peterson and Bliss (2012)). Eventually, a more complete analysis of managerial tone, provides evidence that tone not only predicts stock returns, but also future earnings (and analysts’ earnings forecasts) as well as uncertainty associated with the future earnings (Druz, Wagner and Zeckhauser (2015)). The majority of these studies however focus rather on the ultimate effect of managerial tone on the stock market. Analysts as the main intermediary of managerial tone to the financial markets however are neglected. Yet it is the analysts that are allowed to participate in the question-and-answer sessions following the prepared remarks of the management in these conference calls. Additionally, analysts are dependent upon the information disclosed in these calls in order to issue timely and comprehensive stock recommendations (Breton and Taffler (2001)). At the same time, investors strongly react to the analyst stock recommendations, implying that changes in recommendations have significant influence on the companies’ share prices and thus the stock markets (Womack (1996); Ryan and Taffler (2006); Loh and Stulz (2010)). In order to provide new insights into the analysis of managerial tone and the stock market, this thesis aims at revealing potential effects of managerial tone on the analysts stock recommendations. More precisely, this thesis investigates whether analysts appropriately incorporate the additional information conveyed by managerial tone into their stock recommendations. In this context it is hypothesized that analysts will downgrade their recommendations subsequent to excessive negative tone and upgrade their recommendation following excessive positive tone. In order to investigate this hypothesis, this thesis relies on the theoretical framework of tips and tells introduced by Druz, Wagner and Zeckhauser (2015). Furthermore, textual analysis techniques are applied to quantify managerial tone in the conference call transcripts. The corresponding sample comprises quarterly earnings conference call transcripts of the S&P 500 companies during their fiscal years of 2006, 2008 and 2014. The empirical tests are conducted with the use of panel regression models, which control for industry and CEO fixed effects while standard errors are clustered at the CEO level. In a preliminary analysis the key drivers of managerial tone are determined. The investigation shows that tone in presentations depends highly on earnings growth compared to the same quarter of the previous year as well as earnings surprise. The fitted values of this model constitute the level of managerial tone explained by past performance. Hence the difference between the observed and the fitted values of tone – residual negativity – ought to incorporate additional information regarding the future financial performance of the firm. Consequently, this residual negativity is the main dependent variable for the subsequent examinations. The first part of the main analysis reconsiders the findings of Druz, Wagner and Zeckhauser (2015) by using data of the most recent period of time. That is, the effects of residual negativity on future earnings, analysts’ earnings forecasts and its associated uncertainty are estimated. The corresponding results show that not only predicts excessive negativity lower future earnings, but also distill analysts the information contained in managerial tone and correspondingly adjust their earnings forecasts. Moreover, this thesis identifies a positive relationship between excessive negativity in managerial tone and future earnings uncertainty. Overall, these results confirm the findings of Druz, Wagner and Zeckhauser (2015). Nevertheless, this thesis shows that there is no relationship between residual negativity and analyst forecast errors, implying that analysts succeed at distilling the relevant information conveyed in tone when adjusting their forecasts. These results support the investigated hypothesis of this thesis and consequently pave the way for the proceeding analyses. The second part of the analysis focuses on the effect of managerial tone on analysts’ stock recommendations. The corresponding regression models imply a signifi¬cant relationship between managerial tone and recommendations. That is, excessive negativity in managerial speech results in a downgrading of the corresponding stock recommendation while excessive positivity in managerial tone indicates an upgrading of the respective stock recommendation. An additional analysis regarding the change of consensus recommendations supports this finding. The recognition that analysts adjust their recommendations in accordance to managerial tone provides further evidence on the relevance of soft information in the formation of recommendations as suggested by Breton and Taffler (2001). Most importantly however, this finding complements the investigation of the role of managerial tone in the stock market. |
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