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…
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