In the March issue of The Accounting Review, Finance Professor Sudheer Chava, Alton M. Costley Chair and director, Quantitative and Computational Finance Program, Jeffery Hales, University of Texas, Austin and Khrystyna Bochkay, University of Miami, studied the impact of language used by financial institution leaders in conference calls to investors and found that the more dramatic the language used on calls, the more trading activity and price reactions occurred.
In the paper “Hyperbole or Reality? Investor Response to Extreme Language in Earnings Conference Calls,” the scholars found that linguistics really does make a difference in market earnings and share prices. What matters is the intensity of the language which, they found, results in a rise in investor returns. The study was conducted by recruiting individuals from a crowd-sourcing Internet marketplace to judge the linguistic weight in earnings conference calls. They found that “extreme language is positively associated with future earnings and sales,” while the use of mild language does not affect future performance. Further, the effect of the language wasn’t a one-off but continued to affect returns after 60 trading days following an earnings conference call.
The paper is available in The Accounting Review, Vol. 95, No. 2.