Who is this research for? This research is relevant for corporate executives, financial analysts, and investor relations leaders seeking to understand how CEO language influences market reactions to earnings surprises.
Executive Summary
This research from Joel Andrus at the Sam M. Walton College of Business (Department of Strategy, Entrepreneurship & Venture Innovation) examines how CEO regulatory-focused language influences investor reactions to earnings surprises. Drawing on an archival study of S&P 500 firms from 2003 to 2017, along with two controlled experiments conducted by the research team, the study evaluates how promotion-focused (i.e., gains-oriented) versus prevention-focused (loss-avoidance-oriented) language in CEO shareholder letters influences investor reactions to positive and negative earnings deviations.
The findings suggest that CEO language can meaningfully amplify or cushion market reactions. Promotion focused language that is growth-oriented strengthens positive investor responses when earnings exceed expectations. In contrast, prevention-focused language that is risk-oriented softens negative reactions when results disappoint. Experimental evidence this occurs because investors make attributions about the CEO’s future motivation, effort, and engagement based on that language. For executive teams, CEO language can function as a strategic factor in capital markets outcomes — not merely a reporting choice.
Action Items for Industry
- Align communication strategy with performance context: The effectiveness of communication depends not only on results, but on how those results are interpreted through the CEO’s motivational framing. Firms should consider how the CEO’s regulatory framing interacts with anticipated performance outcomes.
- Understand that investors judge CEOs based on their language: The language a CEO uses can shape investor beliefs about how motivated and committed the CEO will be moving forward. This not only affects how the market responds, as this paper illustrates, but could conceivably also affect how investors evaluate the CEO individually.
- Shareholder letters shape how investors interpret results (not just what they learn): Shareholder letters do more than report financial numbers. The way a CEO talks about goals, risks, and performance helps investors make sense of those results and form expectations about the company’s future. Companies should approach these communications thoughtfully, understanding that how results are framed can influence market reactions.
Quote from the Researcher
“Investors don’t react to earnings surprises in isolation—they interpret them through the CEO’s motivational language. That framing shapes assumptions about the CEO’s future effort and engagement, which can amplify rewards for positive surprises or cushion penalties for disappointments.”
– Joel Andrus
Co-Authors & Affiliations
Srikanth Paruchuri — Texas A&M University, Mays Business School
David W. Sullivan — UNSW (Sydney) Business School, School of Management and Governance
Link to the Original Research
Published in Academy of Management Journal, available here.
📩 Interested in learning more? If you’d like additional information about this research or to connect directly with the researchers, please email us at research@walton.uark.edu.
