Communications professionals have long advocated simple and clear language. They urge corporate executives to eliminate jargon, long-winded phrases and complex sentences. New research now provides them with ammunition to shoot down language that obfuscates.
A study by S&P Global Market Intelligence Quantamental Research reveals that complicated language during earnings calls often precedes declines in company earnings and stock prices.
Consider these remarks from Seagate Technology Chairman and CEO Stephen J. Luczo during the second quarterly earnings call:
A Sentence with 96 Words
“I think from our perspective, we’ve always viewed this business as attractive in terms of its core business of selling into OEMs as well as servicing cloud service providers at one level, but really the opportunity to, I think, as architectures evolve and different customer needs evolve, to have the capability to optimize the devices either at the device level, at the subsystem level or the systems level, and if you do not have the software capability to do that, you really cannot take advantage of what we think would be a potentially significant long-term trend.”
Seagate’s Q2 earnings call ranked as one of the most complicated among S&P 500 companies. The company lost about 35 percent of its market between April 26 and Sept. 7 this year.
The research reveals that executives often use more words and complex language to explain bad news. The average number of words per sentence and the proportion of polysyllabic words used in an earnings call was higher for firms disclosing negative news, such as an earnings miss, and those with higher levels of complexity in their language took fewer questions from analysts, writes David Pope, managing director of Quantamental Research for S&P Global Market Intelligence.
Obfuscation and convoluted language during earnings calls betrays lack of understanding of the situation by executives, possible attempts to hide information, and lack of clear strategies to overcome problems. Perplexing language by executives causes misunderstanding among analysts and investors. That misunderstanding often leads to analyst downgrades and to investors selling the company stock. Written executive statements during earnings calls must contain clear, straightforward explanation of results, problems and strategies to resolve issues – especially when results are not entirely favorable.
Less Time for Questions
Lack of analyst engagement also signals future underperformance. S&P 500 companies that took questions from a smaller proportion of sell-side analysts in Q2 earnings calls underperformed by an average of 2.14 percent over the following two months. Executives may use unclear language when they’re trying to hide something. That consumes time and allows less time for analysts’ questions.
The research shows that investors can gain important clues from how companies communicate with their shareholders and analysts. “Clear communication and transparency can be a good sign if you own a company’s shares or are considering an investment,” Pope says.
The research also demonstrates the need for PR and public affairs professionals to promote clear communications. Trying to confuse people only raises suspicion and causes listeners to conclude you’re trying to hide something.
Bottom Line: CEOs and CFOs may try to hide negative news behind convoluted language in earnings releases and during earnings calls. A company’s earnings and stock price often drop after the CEO fills an earnings call with verbose, complicated language, research reveals. The correlation highlights the value of corporate communication professionals, who have a responsibility to press the CEO and other top executives to use clear, forthright language. Plainspoken and candid win the earnings call game.
William J. Comcowich founded and served as CEO of CyberAlert LLC, the predecessor of Glean.info. He is currently serving as Interim CEO and member of the Board of Directors. Glean.info provides customized media monitoring, media measurement and analytics solutions across all types of traditional and social media.
