Archive for the ‘Linguistic Studies’ Category

Linguistic Diversity and Stock Trading Volume (SSRN)

Authors:  Yen-Cheng Chang,  Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR);  Harrison G. Hong, Princeton University – Department of Economics; National Bureau of Economic Research (NBER); Larissa Tiedens, Stanford Graduate School of Business;
Bin Zhao, Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)
Paper Date: March 14, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 134

Abstract:      

We test the hypothesis that the linguistic diversity of a stock’s investor base leads to more trading. Trading might be due to beliefs differing across languages or investor exposure to multiple languages leading to more trading ideas. Using stock message boards from China, which has ten languages, we measure the linguistic diversity of a stock’s investor base using a Herfindahl index of messages posted from different languages. A firm’s diversity increases in the number of languages spoken in the province where it is headquartered. Using the latter as the instrument, trading volume in a stock rises with its linguistic diversity. We then attempt to discriminate among competing mechanisms. We also show using a sample of forty-one countries that countries with more linguistic diversity have greater stock market turnover.

Executives’ Words Contain Clues to Deception
Stanford Business Magazine, Winter 2010-2011

Language may be a better predictor of a company’s health than accounting reports, according to Prof. David Larcker.

by Robert D. Hof

Just days after Bear Stearns collapsed and was sold for a pittance to J.P. Morgan Chase, rival Lehman Brothers was weathering the economic downturn pretty well, to hear chief financial officer Erin Callan tell it. In a quarterly conference call on March 18, 2008, she assured financial analysts that the company’s businesses remained “strong.” In fact, Callan used that word 24 times during the call, added “great” 14 times, and piled on “incredibly” 8 times. She used “challenging” 6 times and “tough” just once. “Well, that wasn’t too bad,” a Wall Street Journal writer blogged at the close of the call. Yet by September, after it became obvious that risky investments masked by accounting gimmicks might sink the company, Lehman had plunged into the largest bankruptcy in U.S. history…

♦Think you can spot a CEO bluffing? Take the quiz!

How To Tell When A CEO Is Lying (text and audio coverage)
NPR Interview with Professor David F. Larcker and Phd. candidate Anastasia Zakolyukina, 10-18-2010
“I think since the Garden of Eden we’ve been trying to figure this out — who’s lying and who’s not lying,” says David Larcker, a professor of accounting at Stanford’s Graduate School of Business. Opaque Books, Huge Frauds…”

Detecting Deceptive Discussions in Conference Calls
Rock Center Working Paper, July, 2010

Related:

Is That CEO Telling the Truth?
Stanford GSB News, August 2010

How do you tell if CEOs are not being truthful during quarterly earnings conference calls? Stanford Graduate School of Business researchers have developed a model to analyze the words and phrases used during these calls and found some specific speech patterns that give clues.

STANFORD GRADUATE SCHOOL OF BUSINESS—How do you tell if CEOs are not being truthful during quarterly earnings conference calls? Stanford Graduate School of Business researchers have developed a model to analyze the words and phrases used during these calls and found some specific speech patterns that give clues.

After studying Q&A sections of transcripts of hundreds of calls with CEOs and CFOs, the researchers then looked to see whether financial statements being discussed were substantially restated at some point after the call. If they were restated, Professor David Larcker and Anastasia Zakolyukina, a PhD student at the school, reasoned that the executive had been less than candid in describing their firm’s quarterly figures.

Larcker, the James Irvin Miller Professor of Accounting and senior faculty of the Stanford Rock Center for Corporate Governance, and Zakolyukina developed a model to analyze words and phrases used based on prior deception detection research conducted by psychologists and linguists. CEOs who were hiding information were less likely to say “I” and more likely to use impersonal pronouns and references to general knowledge such as “you know.” They also expressed more extreme positive emotions (“fantastic” as opposed to “good”), used fewer extreme negative emotions, and fewer certainty and hesitation words. They were less likely to refer to shareholders value.

Results from their model are 4% to 6% better than a random guess. Yet the authors offered some cautions about their work. “First, we are not completely certain that the CEO and/or CFO know about the manipulation when they answer questions during the conference call,” they wrote. They also cautioned the words they studied might not be “completely appropriate for capturing business communication.” But they said, the results were strong enough to warrant additional research.

Is That CEO Telling the Truth?
Stanford GSB News, August 13, 2010
How do you tell if CEOs are not being truthful during quarterly earnings conference calls? Stanford Graduate School of Business researchers have developed a model to analyze the words and phrases used during these calls and found some specific speech patterns that give clues.

Referenced working paper:
Detecting Deceptive Discussions in Conference Calls (PDF)
Working paper dated: July 29, 2010
Authors: Professor David F. Larcker, Stanford University – Graduate School of Business; PhD student Anastasia A Zakolyukina, Stanford Graduate School of Business

Paper Abstract:
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label the Question and Answer section of each call as “truthful” or “deceptive”. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample performance of the models that are based on CEO or CFO narratives is significantly better than random by 4%- 6% (with 50% – 65% accuracy) and provides a significant improvement to a model based on discretionary accruals and traditional controls. We find that answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self-references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words.

Related Media Coverage: Wall Street Journal Blogs: Deal Journal, “How Can You Tell If A CEO Is Lying?, August 11, 2010

Closer Look Series: Topics, Issues and Controversies in Corporate Governance, No. CGRP-07, by David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program, And Brian Tayan, MBA ’03, Stanford GSB, Date: 7-23-2010

• Financial Manipulation: Words Don’t Lie

Reliable financial reporting is critical to the efficiency of capital markets. Despite its importance, managers may have incentive to misrepresent financial results for personal gain.

While academics and professionals have developed models to detect aggressive accounting, these have been met with limited success.Still, there is some evidence that quantitative models may be improved through the application of techniques developed by linguists and psychologists to identify deceptive language and behavior.

Why don’t shareholders and analysts apply these techniques to evaluate the truthfulness of management?