How Executives Try to Cover Up Bad News

Financial professionals on the floor of the New York Stock Exchange.

Photo by Chris Hondros/Getty Images

Most publicly traded companies organize a quarterly earnings call timed to coincide with their SEC-mandated quarterly earnings data releases. The calls vary, but generally some executives speak and then they field questions from stock market analysts who cover the companies. It’s not totally obvious what the point of this whole undertaking is, but Lauren Cohen, Dong Lou, and Christopher Mallory have done an interesting piece of research on it. They find that sometimes firms “cast” their conference calls by disproportionately calling on bullish analysts and those firms tend to underperform in the future.

In other words, most companies play it straight. They field a range of questions. They perhaps like questions from bullish analysts because they tend to be softball questions. But they perhaps also like questions from bearish analysts, because it’s a chance to directly reply to common bearish concerns and set minds at ease.

This calculation shifts, however, for executives who have reason to believe that bad news is coming in the future. Those executives avoid calling on bearish analysts, because they won’t be able to provide convincing answers to skeptical questions.

I would put this whole thing down as yet another demerit against the Cult of Shareholder Value. Any time top-level executives are spending thinking about issues like how to manipulate the quarterly earnings call is time they are not spending thinking about the actual management of the enterprise. And yet managing large enterprises is really hard! In theory, the CEO gets paid the big bucks precisely because it’s hard.