Earnings conference call tone and stock returns: evidence across the globe

Coverage of earnings call transcripts has improved considerably over time and, as we will show, long and short factor portfolios based on the textual tone signal demonstrate favorable risk/return profiles. Supported by several studies of robustness, our findings suggest that the manager tone signal, despite being correlated with momentum, is an implementable source of value-add in a global equity portfolio. 

Corporate managers possess superior information about a company (e.g., Healy and Palepu, 2001), and earnings conference calls are widely followed by investors. The Q&A segment, when managers address probing questions from analysts who closely follow the company, can be especially revealing given its unscripted nature. Moreover, research (e.g., Price et al., 2012) shows that information extracted from the Q&A segment of the call (as opposed to the prepared statement) is less likely to be already contained in the press release. 

Most academic research on earnings call tone focuses on the US market, deriving the tone signal from both analysts’ questions and managers’ answers (e.g., Price et al., 2012 and Druz et al., 2020). Indeed, previous evidence of whether investors react more to analyst tone or manager tone is mixed: Using data from a 16-quarter sample period for US stocks, Brockman et al. (2015) find that analyst tone leads to stronger investor reaction; however, Brockman et al. (2017) note precisely the opposite when they investigate earnings conference call transcripts of companies with securities trading in the Stock Exchange of Hong Kong.

Our earnings call tone signal aims to capture sentiment expressed by corporate managers that is potentially predictive of a company’s future stock performance. In a robustness study, we also examine the sentiment expressed by analysts and managers combined. Different from most academic literature focusing on tone derived from earnings calls in one region (mainly the United States), and sometimes over a short time span, we investigate the predictive power of the manager tone signal on stock returns in five regions across the globe over a decade.

In this article, we first look at the coverage and characteristics of English-language conference call transcripts across all regions of interest. Next, we outline our rationale and steps for constructing a manager tone signal which is implementable in a multi-factor portfolio management framework. Then, we discuss the signal’s stand-alone performance as well as its relationship with common equity factors. Finally, we conduct several robustness tests, including alternative methods of signal construction.

Characteristics of earnings call transcripts

As a first step, we investigate the historical coverage of English-language earnings call transcripts for companies in five regions: United States (US), Canada (CA), Europe excluding United Kingdom (EXU), United Kingdom (UK) and Australia (AU) – sourced from FactSet Research Systems, Inc. We find that US has the best coverage, while coverage in other regions has improved over time. Additionally, we note that the coverage is generally better for larger than for smaller companies; for instance, on average only 55.7% of companies with securities included in the UK All Cap universe have earnings call transcripts available over the decade from January 1, 2010 to December 31, 2019, whereas transcript coverage is 74.5% for the companies with securities included in the UK Large Cap universe.¹