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Essays on Financial Communication in Earnings Conference Calls Essays on Financial Communication in Earnings Conference Calls Xiaoxi Wu This dissertation is submitted for the degree of Doctor of Philosophy September 2019 Department of Accounting and Finance Abstract Earnings conference calls are an important platform of financial communication. They provide researchers with unique opportunities to observe firm managers’ and financial analysts’ interactions and natural communication style in a daily-task environment. Relying on multidisciplinary theories and methods, this dissertation studies financial communication in conference calls from both the managers’ and the sell-side analysts’ perspectives. It consists of three self-contained studies. Chapter 2 focuses on managers’ communication strategies in conference calls. It explores, in the small non-negative earnings surprises setting, whether non-manipulators design communication strategies to separate themselves from earnings manipulators, and whether manipulators pool through obfuscation. Chapters 3 and 4 focus on sell-side analysts’ communication behaviour in conference calls. Chapter 3 examines how analysts’ people skills affect their communication behaviour and relationships with firm management. Chapter 4 applies both qualitative and quantitative discourse analyses and investigates how analysts use linguistic politeness strategies to establish socially desirable identities in publicly accessible analyst-manager interactions. The three studies combined contribute to the accounting literature by furthering our understanding of managers’ and analysts’ financial communication incentives and behaviour from multiple perspectives. i Acknowledgements I would like to first express my deepest gratitude to my dissertation chairman, Steve Young, for his generous guidance, feedback and mentorship. His unwavering enthusiasm for research and education has been a great inspiration to me. I also appreciate the thoughtful supports and constructive insights of Igor Goncharov, Bill Mayew, Cathy Salzedo, Veronika Koller, Vivien Urquhart, Zoltán Novotny-Farkas, Linda Myers, Laurence van Lent and Jeffrey Unerman. I acknowledge the financial supports from the Department of Accounting and Finance at Lancaster University and my parents. A special thank you goes to the faculty members and Ph.D. students in the accounting group at Duke’s Fuqua School of Business for hosting me as a visiting doctoral scholar. I would also like to thank my viva examiners, Walter Aerts and Justin Chircop, for their helpful and constructive comments on my dissertation. I am truly grateful for Cezary Fiedler, my best friend, who has always been there for me. Without him, the completion of the Ph.D. program would not have been possible. I also want to thank Yusiyu Wang, Qiru Zhang, Zhifang Zhang and Claudia Marangoni for being not only good colleagues, but also amazing friends. ii Declaration of Authenticity I, the undersigned, declare that this dissertation is original and authentic, and is the result of my own work. Except where acknowledged and referenced, all statements and arguments are my own. I also declare that Chapter 3 of this dissertation is based on a paper co-authored with William J. Mayew, a professor of accounting at the Fuqua School of Business at Duke University, and that Chapter 4 is based on a paper co-authored with Veronika Koller, a reader in discourse studies at the Linguistics and English Language department at Lancaster University and my Ph.D. co-supervisor. For these two chapters, I was responsible for developing the research ideas (with suggestions from the co-authors), designing and conducting the empirical analyses (with advice from the co-authors) and writing the chapters. The contributions of the co-authors have been limited to the reasonable level expected in a doctoral dissertation at a research university in the United Kingdom. Xiaoxi Wu September 2019 iii Table of Contents CHAPTER 1. INTRODUCTION .................................................................................. 1 CHAPTER 2. SMALL NON-NEGATIVE EARNINGS SURPRISES AND CONFERENCE CALL COMMUNICATION ............................................................ 7 2.1. INTRODUCTION ...................................................................................................... 7 2.2. HYPOTHESES DEVELOPMENT .............................................................................. 13 2.3. RESEARCH DESIGN ............................................................................................... 17 2.3.1. Small non-negative earnings surprises .......................................................... 17 2.3.2. Non-manipulators/manipulators classification .............................................. 17 2.3.3. Measures of conference call communication strategies ................................ 21 2.3.3.1. Negative FLD ......................................................................................... 21 2.3.3.2. Obfuscation ............................................................................................. 24 2.3.4. Empirical model ............................................................................................ 25 2.4. SAMPLE SELECTION AND DESCRIPTIVE STATISTICS ........................................... 27 2.5. ANALYSIS ............................................................................................................. 31 2.5.1. Differences in negative FLD between non-manipulators and manipulators . 31 2.5.2. Differences in obfuscation between non-manipulators and manipulators .... 34 2.5.3. Changes in communication strategies ........................................................... 36 2.5.4. Robustness tests ............................................................................................. 40 2.5.4.1. Alternative non-manipulator/manipulator classifications ....................... 40 2.5.4.2. Alternative obfuscation measures ........................................................... 42 2.5.4.3. Entropy balancing for the non-manipulator and manipulator sub-samples ............................................................................................................................. 42 2.6. MARKET REACTION TESTS .................................................................................. 44 2.7. SUMMARY AND CONCLUSION ............................................................................... 51 APPENDIX 2.1. CLASSIFICATION OF FORWARD-LOOKING DISCUSSION .................... 54 APPENDIX 2.2. VARIABLE DEFINITIONS ..................................................................... 56 CHAPTER 3. PEOPLE SKILLS AND ANALYST OUTCOMES .......................... 69 3.1. INTRODUCTION .................................................................................................... 69 3.2. PRIOR LITERATURE AND HYPOTHESES DEVELOPMENT ..................................... 76 3.3. RESEARCH DESIGN ............................................................................................... 78 3.3.1. Empirical models ........................................................................................... 78 3.3.2. Sample ........................................................................................................... 82 3.3.3. Conceptual measurement of people skills ..................................................... 83 3.3.4. Operational measurement of people skills .................................................... 87 iv 3.4. DESCRIPTIVE STATISTICS AND VALIDITY OF !"#$%"&'(%%) ............................... 90 3.4.1. Correlation matrix and descriptive statistics ................................................. 90 3.4.2. Validity of PeopleSkills ................................................................................ 91 3.5. EMPIRICAL RESULTS ............................................................................................ 97 3.5.1. People skills and management relationships ................................................. 97 3.5.2. Robustness tests ........................................................................................... 100 3.5.2.1. Downsizing the British ethnic group .................................................... 100 3.5.2.2. Additional controls ............................................................................... 101 3.5.2.3. Heckman two-stage procedure for estimating the order of questions .. 103 3.6. IMPLICATIONS: DO ANALYSTS BENEFIT FROM BETTER PEOPLE SKILLS? ........ 104 3.7. CONCLUSION ...................................................................................................... 108 APPENDIX 3.1. VARIABLE DEFINITIONS ................................................................... 111 APPENDIX 3.2. ETHNICITY AND COUNTRIES/REGIONS ........................................... 115 APPENDIX 3.3. INGRATIATION DICTIONARY ............................................................ 116 CHAPTER 4. ANALYST DISCOURSE, POLITENESS BEHAVIOUR AND IDENTITIES ............................................................................................................... 132 4.1. INTRODUCTION .................................................................................................. 132 4.2. POLITENESS THEORY ......................................................................................... 137 4.2.1. Definition and importance of politeness ...................................................... 138 4.2.2. Faced-based politeness theory ..................................................................... 139 4.2.2.1. Face and
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