In the financial world, where insights can change markets, standing out as an analyst is both a skill and a strategy. But how do these analysts stand out? And how does standout analysts’ work shape market reactions? According to recent research from the Walton College, the answers are simple: by asking the right questions at the right time—specifically, during earnings conference calls.
In financial markets, information is available to anyone with internet access. Analysts compete with other analysts, which is why some try to differentiate themselves in published research and their information-gathering processes. Earnings conference calls may thus play a key role in this attempt for analysts to differentiate themselves.
Conference calls present a unique opportunity to observe analysts’ information gathering and sharing processes. Kristian D. Allee (University of Arkansas), Chuong Do (University of Nevada) and Huy N. Do (University of Tulsa) designed a measure to capture exactly how “unique” each conference call question is in their article, “Can Analysts Elicit Useful Information by Asking Unique Questions in Earnings Conference Calls?”
Why Conference Calls Matter
Earnings conference calls are just one part of a firm’s disclosure strategy. While so much information from firms is already available to the public, namely annual reports, press releases, and proxy statements, these are often mandatory disclosures. Earnings calls are a voluntary disclosure that gives stakeholders a better understanding of a firm’s strategies, operations, and performance.
These calls usually feature a prepared, uninterrupted management discussion section and a question-and-answer (Q&A) session where participants, who are mostly sell-side analysts, are welcome to ask management questions. These calls provide relevant information to the financial markets. That is, prior research shows that small trades increase in number after open calls, which is consistent with individual investors trading following information released during the call.
Quarterly earnings conference calls were chosen because they are frequent and public calls where firms communicate their plans and expectations with outsiders. These calls allow interested participants to pose questions to firm managers, and they contain information that is vital to firms’ earnings press releases and mandatory filings.
Based on Allee and his coauthors’ study, the Q&A section of earnings calls is far more informative than the management discussion—but only when unique questions are asked by analysts. This is because conference calls offer a platform for firms to engage in two-way communication with external stakeholders. The interaction between managers and analysts provides useful insights into managers’ disclosure strategies as well as information gathering processes.
Yes, some earnings calls are somewhat “staged,” as the managers choose which analysts are invited to participate in the Q&A portion based on which had more favorable recommendations for the firm’s stock. But at the same time, even canned questions and answers tell a story about the perception the firm wants to create in the market.
In addition to focusing on the potential for “staged” interactions, previous studies have also documented analyst herding behavior, which is the tendency for analysts to issue recommendations in line with their peers. For example, if most analysts recommend a “buy” rating for a stock, one analyst may agree with this rating to go with the majority, even if their independent analysis suggests otherwise. Also, inexperienced analysts were more likely to be terminated when their forecasts were bolder, suggesting that there are risks to standing out from the group.
Allee and his coauthors also investigated the factors that determine analysts’ different questions in quarterly earnings conference calls, how these questions influenced the discussions within the call, and whether the market reacted to different analyst behaviors on earnings calls. The question of what type of information analysts’ questions sought was of particular interest. For example, if an analyst asked others to explain factors behind the increase in sales revenue, it shows the analyst wants detailed information on the trend in revenues.
Analysts with superior private information asked more unique questions on the call, and questions posed by larger brokers and those who forecast more frequently were less unique. The uniqueness of individual questions thus varied with the analysts’ individual characteristics.
Also, when questions differed from previous questions in the call, the number of topics analysts addressed in the call increased. The topics that managers covered in their answers also increased with more unique questions. Unique questions create an opening in the call and can elicit new and different topics of discussion.
More unique questions increased the likelihood of analysts revising forecasts after the call, suggesting information acquisition by the analysts and information sharing with the market. The greater the earnings surprise, the greater the revision from analysts who ask relatively unique questions during the call.
The researchers also observed how the market responds to these unique questions by documenting investors’ immediate reactions during the call and delayed reactions to analysts’ forecast revisions after the call. An abundance of unique questions may be a signal that certain interactions are not staged, and that the analysts asking those questions may have an information advantage over others.
A Question Is Not Just a Question
The questions we ask matter. More skilled analysts know this almost intuitively and can elicit information from managers on conference calls, leading to more accurate forecasts and informative stock recommendations. Asking unique questions on calls, however, also carries trade-offs as analysts risk damaging their relationship with managers and sharing newly solicited information with the public.
Therefore, investigating analysts’ questions in earnings conference calls provides insight into the data needs and analysts’ reputational concerns while also shedding light on their public information gathering strategies. If you want to know how an analyst thinks or where their forecasts may be headed, paying attention to the questions they ask is a good place to start.
Allee and his coauthors show the nuanced interactions between analysts, the interactions analysts have with managers, and analysts’ behavior over time. It also provides evidence that analysts’ questions during conference calls can foreshadow their forecasting behaviors after the call. Furthermore, associations between analysts’ questions and the number of topics discussed during Q&A, and different information gathered by analysts were shown to have the potential to influence the market’s reaction to the earnings conference call. So, yes, the unique questions we ask matter both because they give us a chance to show what interests us (or hint at what we know) as well as create a space for different topics to enter the discussion.
Kris Allee
