Organizational Psychological Capital During Earnings Conference Calls: Mitigating Shareholders’ Sell-Off in the Face of Earnings Surprises?

Abstract

Publicly traded firms release their earnings figures quarterly, and subsequently hold earnings conference calls where top managers can comment on firm strategy. Markets are particularly sensitive to earnings surprises, and conference calls are becoming an increasingly useful tool capable of mitigating shareholders' negative reactions to surprises on earnings. This article argues that top managers who cue organizational-level positive psychological capital (PsyCap) are likely to mitigate investors' reactions unanticipated changes in earnings. The developed hypotheses draw on arguments from the incremental useful information perspective, upper echelons theory, and the PsyCap literature. The analysis relies on a longitudinal data set composed of 1,920 observations including calls held for firms listed on the S&P 500 for all quarters of 2015. Computer-assisted text analysis is used to assess cues of organizational PsyCap included within each call, and event-study methodology is used to assess market performance. The findings suggest that organizational PsyCap mitigates stockholders' negative reaction to earnings surprise, thereby indicating that psychological capital is well-perceived by investors and adds back market value for firms. A discussion of the findings and their implications for research and practice concludes the study.

Executive cues of organizational virtue and market performance: Creating value during times of earnings uncertainty

“…These losses are usually considered to stem from information asymmetries that inhibit a shareholder's ability to properly forecast a firm's earnings (Chaney & Lewis, 1995), and such an inability usually results in a stock price penalty (Chatterjee et al, 1999). Therefore, based on the conceptual observations just presented and on prior empirical evidence (e.g., Jancenelle, 2018;Skinner & Sloan, 2002), we expect that shareholders will not reward firms that post earnings surprises (i.e., earnings figures that differ from the market's consensus expectations). Fortunately, earnings conference calls are held by firms shortly after their earnings releases, and such calls provide an opportunity for top managers (e.g., CEO and CFO) to comment on the firm's quarter and strategy, as well as to respond to questions from analysts.…”

“…Further, managers need to be aware that corporate disclosure mediums such as earnings conference calls only provide a limited space for effective communication (Austen-Smith & Banks, 2000). Consequently, signaling ineffective virtues or virtues known to have a negative effect on firm performance necessarily comes with the opportunity cost of not signaling another effective virtue or another cue known to have an effect on firm performance highlighted in prior research-such as emotional tone (Blau et al, 2015) or psychological capital (Jancenelle, 2018). This investigation's finding regarding the role of zeal (cues of enthusiasm, fun, imagination, and excitement) in mitigating investors' reactions to earnings surprises may seem counterintuitive, as this virtue is typically not expected of top managers.…”

“…Prior research has suggested that conference call discussions initiate changes in market value beyond those initially triggered by a firm's earnings release (Bushee et al, 2003). As such, they are often seen as a key tool capable of reducing information asymmetry between shareholders and managers (Kimbrough, 2005), and prior research has often relied on signaling theory to identify cues capable of reducing information asymmetry, such as cues of positive psychological capital (Jancenelle, 2018) or emotional tone (Blau et al, 2015).…”

“…While prior studies have often relied on conceptual lenses emerging from the fields of finance, accounting, and economics—such as the useful incremental information perspective (Jancenelle, 2018; Merkl‐Davies & Brennan, 2007)—to study the effect of managerial cues during earnings conference calls, extant literature does not appear to have considered the influence of organizational ethical behavior. Yet, concepts from the field of business ethics, such as the role played by organizational virtue ethics, may offer unique insights on market value creation following earnings uncertainty.…”

Cueing Morality: Are All Moral Foundations Recognized Equally by Shareholders?

“…For example, textual emotional tone has been found to be able to mitigate a stock sell-off due to an earnings surprise (Blau, DeLisle, and Price 2015). Other scholars have found that rhetorical features of managerial optimism and certainty were also able to add back firm value in the face of earnings uncertainty (Jancenelle, Storrud-Barnes, Iaquinto, & Buccieri, 2016), corporate entrepreneurship (Jancenelle, Storrud-Barnes, & Javalgi, 2017), and positive psychological capital (Jancenelle, 2018). According to the incremental useful information perspective (Merkl-Davis & Brennan, 2007), new cues embedded in corporate disclosure mediums such as conference calls are able to trigger new buy decisions from shareholders if they contain new positively-interpreted useful information regarding the true economic state of the firm.…”