Along with a variety of linguistic tips, the SEC’s Plain English Handbook encourages companies to adopt a presentation style in their reports that uses images and graphical depictions of numbers. But investigators at the University of Illinois have identified a set of conditions calling into question the notion that graphics are always beneficial.
Specifically, they find investors are most willing to invest in a firm when there is a ‘fit’ between how it frames strategy and how it presents subsequent performance data. Remarkably, a review of Fortune 100 CSR reports finds about three quarters demonstrate a ‘misfit’.
The study says that companies can talk about their CSR efforts in terms of high level, global details (for example: ‘We are saving the planet’), or low-level, community details (‘We are cleaning up the local community’). In addition, it argues that words are better for explaining high-level efforts, while pictures are better when discussing low-level issues.
‘When a fit exists between the strategy frame and presentation style of the CSR report, information contained in the report is easier to process,’ states the report.
For example, according to study co-author Brooke Elliott, if investors are thinking of a firm in terms of ‘saving the world’ and are then presented with performance information that gets them thinking in terms of specific activities such as recycling coffee cups (which pictures are more likely to inspire because they encourage thinking about specific activities), those investors are less likely to invest in the company.
‘Likewise, if you get investors thinking at a low level in terms of local community efforts, it doesn’t click in their heads if you then present performance information in a way that gets them thinking in terms of broad, generic activities like cleaning up rivers around the world,’ says Elliott. ‘[In that case] written words are more likely to promote as they encourage thinking about broader activities.’
The ‘fit’ effect is driven by subjective feelings of processing fluency that lead to positive effect. This in turn serves as a cue that the performance information presented is reliable – which influences willingness to invest. ‘A lot of companies do this completely wrong,’ says Elliott, who believes her study’s findings can be generalized beyond the CSR setting.
The price of silence
Silence, they say, is golden. When it comes to the Q&A part of quarterly conference calls, however, silence will cost you. New research calculates its price and casts doubt on the benefits of hosting a conference call, especially for firms with a small analyst following.
‘We have systematically documented an immediate and negative market reaction following conference calls where managers have failed to elicit a sufficient number of questions,’ says Shuping Chen, associate professor of accounting at the University of Texas at Austin. ‘Firms must be prepared for the possibility and try to limit the damage beforehand.’
Having sifted through thousands of call transcripts from 2002 to 2010, Chen, along with colleagues at Tilburg University, finds about 1 percent feature no interaction between analysts and managers during the Q&A session. The next day, those companies experienced an average abnormal stock price return 95-135 basis points lower than other companies. The investigators find similar results for a second sample group of firms that received ‘too few’ questions (roughly fewer than 10).
‘The companies suffering the most here are those that most need traction in the marketplace,’ Chen points out. ‘Our findings suggest these companies may want to rethink their IR program choices.’ She suggests face-to-face meetings with investors or ‘buying’ analyst coverage might be better information-sharing alternatives to open earnings calls.
‘Or else be sure to pre-arrange with an analyst to ask the first question,’ she adds. ‘That can get the ball rolling because questions usually beget more questions.’
