Are Accounting Words Accountable? Managers' Use of Accounting Terms in Earnings Calls Open Access
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I conduct a fundamental analysis of qualitative information embedded in earnings conference call language. I predict that managers will frequently use accounting terms in voluntary disclosures when they possess positive private information. This disclosure strategy cannot be easily replicated by managers with negative private signals because information conveyed via accounting terms could be ex post verified and therefore carries reputation and litigation cost. I use a computer program to analyze the earnings call transcripts for managers’ use of common accounting terms. I find that abnormal mentions of accounting terms are associated with higher future earnings, while controlling for the underlying quantitative accounting variables. I also find that the stock markets do not fully understand the implication of managers’ use of accounting terms in earnings calls. Trading strategies based on the occurrences of accounting terms are highly profitable. In the additional analysis, I show that the profit is most attributable to managers’ discussion in earnings calls’ presentation sessions. Lastly, evidence suggests that investors are sensitive to repeated references of earnings but overlook frequent occurrences of other accounting terms studied.