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
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