IR teams are used to analysts courting management through a bit of buttering up on conference calls. But the extent of their fawning has been laid bare by a new study that trawled thousands of earnings call transcripts to find out how often analysts roll out a compliment.
The answer? A great deal. Jonathan Milian and Antoinette Smith, researchers at Florida International University, published a study last month in the Journal of Behavioral Finance that analyzed more than 16,000 transcripts released by S&P 500 companies between 2003-2013.
Searching for terms such as ‘good job,’ ‘great year,’ ‘congratulations’ and the ubiquitous ‘great quarter,’ they found thousands of examples. On average, companies received praise on more than half of all calls.
Analysts offered up a median 2.5 congratulatory phrases per transcript. The highest individual number was 21, delivered on an Urban Outfitters call in 2008 following a 45 percent surge in quarterly profits.
The study finds, unsurprisingly, that you get more compliments as the earnings surprise gets bigger. It also reports that a jump in admiration correlates with a 0.9 percent increase in stock returns over the next 60 days. ‘This suggests that analysts’ compliments are a good proxy for qualitative information that investors underreact to,’ say Milian and Smith.
This level of backslapping, it’s fair to say, doesn’t show the workings of the capital markets in the best light. But, for the analysts concerned, the fawning may pay off.
In a follow-up study, which is not yet published, Milian and Smith find analysts who offer more praise tend to have more accurate forecasts. They suggest that praise leads to greater management access, which in turn allows for more informed analysis. Who says flattery doesn’t pay?
