Stock prices tumble when CEOs use abstract or vague language to describe company progress on earnings calls, according to a study published in Strategic Management Journal.
Researchers examined 500 companies from the S&P 1500 from 2007 to 2013. They used a computer program to identify language used on more than 6,000 earnings calls as either concrete or abstract and compared company stock performance immediately after the call and 24 hours after. They found when CEOs used concrete, detailed words, it built trust among analysts — especially if the company wasn't performing well.
If a company falls short of expectations but the CEO can explain specifically why they missed the mark, they will still develop trust with analysts, according to study author Jerayr "John" Haleblian, PhD, professor of management and associate dean of UC Riverside. He gave the university's news site UCR Today two examples of CEO statements to demonstrate his findings:
- "Our gross profit increased by 8 percent to 20.2 million from 18.7 million because we have launched five new products and opened 52 new stores nationwide."
- "We expect to do better this year because of actions we're taking to grow the firm."
Although both statements communicate similar themes, the first is much more specific. The researchers found concrete language was generally associated with positive investor reactions. However, they note if a company has a low-risk profile, it may be more appropriate to use abstract language when communicating performance.
Read more about Dr. Haleblian's work here.
More articles on leadership and management:
Trump against cuts to Medicare, Medicaid
How Sen. Orrin Hatch’s replacement could shake up the healthcare debate
How developing an inner 'impartial spectator' can improve leadership ability