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Corporate Social Responsibility and Information Asymmetry: Do Earnings Conference Calls Play a Role?

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Abstract

This study examines whether firms’ corporate social responsibility (CSR) performance affects the informativeness of their earnings conference calls. Controlling for confounding information from earnings releases, we find a positive association between CSR performance and the magnitude of market reactions to conference calls. This association persists after controlling for systematic differences between firms with strong and weak CSR performance. A structural equation model further demonstrates that this positive association is due to firms with strong CSR performance providing a greater amount of information, whereas no evidence suggests that the positive association is attributable to the market perceiving the information to be more credible. We also find incremental effects of managers’ tone and firms’ possession of future unfavorable information on the positive association between CSR performance and the market reactions to the calls. Moreover, CSR performance is associated with reductions in financial analysts’ forecast dispersion. Overall, these results are consistent with the idea that the ethical standards associated with CSR performance promote informative disclosures.

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Notes

  1. Similar to these studies, this paper uses the term “CSR performance” to refer to firms’ activities related to CSR.

  2. Some of these studies focus on managers’ tone (e.g., Chen et al., 2018; Davis et al., 2015; Price et al., 2012). Others explore linguistic attributes, such as not answering participants’ questions (Gow et al., 2021; Hollander et al., 2010), scripting (Lee 2016), self-inclusive language (Chen and Loftus 2019), extreme language (Bochkay et al., 2020), and euphemisms (Suslava 2021). These studies provide compelling evidence that the linguistic attributes of conference calls contain valuable information that has subsequent economic consequences, such as impacting stock price movements, influencing analysts’ forecast revisions, and affecting changes in bid-ask spread.

  3. For brevity, we refer to firms with strong CSR performance as CSR firms.

  4. We thank an anonymous reviewer for raising this point.

  5. Consistent with Brochet et al. (2016), we require the occurrence of the conference call to be within the 3-day window around the earnings announcement date.

  6. Brochet et al. (2016) employ absolute returns to measure the informativeness of conference calls. Mayew et al. (2020) also use absolute returns to capture the information content of manager-analyst dialog.

  7. Using earnings surprise as a control for confounding earnings-announcement-related information is consistent with studies analyzing the pricing effect of conference calls (e.g., Chen and Loftus 2019; Lee 2016; Price et al., 2012; Suslava 2021).

  8. In models predicting conference call returns, Hollander et al. (2010), Chen et al. (2018), and Mayew et al. (2020) also control for short-term returns immediately preceding the conference call dates as proxies for the confounding information from earnings releases.

  9. In untabulated results, we partition the aggregated CSR score into a CSR strengths score (the sum of total CSR strengths) and a CSR concerns score (the sum of total CSR concerns), and find that the magnitude of conference call returns increases with CSR strengths but decreases with CSR concerns.

  10. We note that the number of observations in the treatment group (CSR > 0) and the control group (CSR <  = 0) may differ in the final PSM sample due to the requirement of non-missing values for other variables merged into the matched CSR dataset.

  11. The definition of positive words and negative words is based on the word lists from Loughran and McDonald (2011).

  12. Stemming removes the affixes of words and lemmatization uses part-of-speech tapping to identify grammatical categories in order to return the words to proper base form (Bach et al., 2019). While there is an ongoing debate about the suitability of applying these approaches to financial text (Huang et al., 2018; Porter 1980), they are widely employed in financial and accounting research (e.g., Lang and Stice-Lawrence 2015; Li et al., 2021; Merkley 2014). To ensure the robustness of our findings, we conduct tests using both the raw tone measures and the tone measures with the pre-processing techniques.

  13. In Price et al.’s (2012) regression models testing the effect of linguistic tone on market reactions to conference calls, the measures of abnormal return, tone, and earnings surprise are also computed without taking absolute values.

  14. For example, Lee (2016) provides evidence that analysts downgrade their forecasts for firms that use scripted narratives from the presentation session of the conference call when answering participants’ questions. Huang et al. (2018) show that analysts’ interpretation of the information obtained from conference calls helps investors to confirm information they obtained on their own.

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Authors and Affiliations

  1. Department of Accounting & Information Systems, Rutgers Business School, Newark & New Brunswick, USA

    Dan Palmon

  2. School of Accounting, Southwestern University of Finance and Economics, Chengdu, China

    Yifei Chen

  3. School of Finance, Southwestern University of Finance and Economics, Chengdu, China

    Biao Chen

Authors
  1. Dan Palmon
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  2. Yifei Chen
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  3. Biao Chen
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Correspondence to Dan Palmon.

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Appendix: Variable Definitions

Appendix: Variable Definitions

Variable

Description

Dependent variables

 

ABRET (0,1)

The 1-day buy-and-hold abnormal return at the date of the conference call, estimated using Fama–French three factor model plus momentum

|ABRET (0,1)|

The absolute value of ABRET (0,1)

DISPERSION_NEXTQRT

Analysts’ earnings forecasts dispersion in the quarter after the conference call date

ACCURACY_NEXTQRT

The average absolute value of analysts’ earnings forecasts minus actual earnings in the quarter after the conference call date, scaled by the stock price 2 days before the earnings announcement date

Mediating variables

LEN

The natural logarithm of the total count of words in the conference call

TURNS

The natural logarithm of the total count of turns-at-talk during the Q&A session of the conference call, where turns-at-talk refers to continuous speeches by a single participant

FORWARD

The number of forward-looking words spoken by the managers scaled by the total number of words spoken by the managers. The definition of forward-looking words is based on the word list from Matsumoto et al. (2011)

HARDINFO

The number of informative numbers (excluding dates, section numbers, etc.) in managers’ presentation session and in managers’ answers to participants’ questions in the conference call, scaled by the total number of words in these two sessions (similar to Dyer et al., 2017)

SCRIPT

Lee’s (2016) measure of managers’ scripting during the conference call, measured as the residual from the regression model:

COSINE_PA = α + β1LENGTH_P + β2LENGTH_P2 + β3LENGTH_P3 +

β4LENGTH_A + β5LENGTH_A2 + β6LENGTH_A3+ ε,

where COSINE_PA is the cosine similarity between the function words in the presentation session and the function words in the managers’ answers, LENGTH_P is the total words count of the presentation session and LENGTH_A is the total words count of the managers’ answers. The residuals are ranked into deciles and divided by 9

Testing Variables

CSR

The total number of strengths minus the total number of concerns about the firm’s CSR performance

CSRA

The sum of the scaled CSR strengths minus the sum of the scaled CSR concerns, where the scaled CSR strengths (concerns) is the total number of strengths (concerns) in each CSR category scaled by the maximum possible number of strengths (concerns) in that category in each year

IRREGULARITY

An indicator variable equal to one if a firm experienced one or more financial misstatements or SEC enforcements in the previous quarter, and zero otherwise

TONE

Managers’ tone in the conference call, measured as the count of positive words in the presentation session and managers’ answers in the Q&A session, minus the count of negative words in the presentation session and managers’ answers in the Q&A session, scaled by the total words count in the presentation session and managers’ answers in the Q&A session. The definition of positive words and negative words is based on the word lists from Loughran and McDonald (2011)

FUTUREMISS

An indicator variable equal to one if the earnings surprise in the next quarter is negative, and zero otherwise, where earnings surprise is calculated as the actual earnings in that quarter minus the average analysts’ earnings forecasts in the quarter prior to the earnings announcement date, scaled by the stock price 2 days before the earnings announcement date

FUTURELOSS

An indicator variable equal to one if the firm’s net income in the next quarter is negative, and zero otherwise

Control Variables

 

SURP

The earnings surprise in the quarter preceding the conference call date, where earnings surprise is the actual earnings in that quarter minus the average analysts’ earnings forecasts in the quarter prior to the earnings announcement date, scaled by the stock price 2 days before the earnings announcement date

|SURP|

The absolute value of SURP

ABRET (− 1,0)

The 1-day size-adjusted abnormal return 1 day before the date of the conference call, estimated using Fama–French three factor model plus momentum

|ABRET (− 1,0)|

The absolute value of ABRET (− 1,0)

ROA

Income before extraordinary items scaled by total assets

CFO

Cash flow from operations scaled by total sales

MTB

The natural logarithm of the market value of equity divided by the book value of equity

ABSDACC

The absolute value of discretionary accruals based on the modified Jones model (Jones, 1991) estimated each quarter for every 2-digit SIC code

LEVERAGE

Total liabilities divided by total assets at fiscal year-end

CFVOL

The natural logarithm of the standard deviation of operating cash flows in the past five years

EARNVOL

The standard deviation of the asset-scaled income before extraordinary items in the past five years

PRICEVOL

Stock price volatility, calculated as the standard deviation of daily closing stock prices in the year preceding the conference call date

SIZE

The natural logarithm of market value of equity, which is the number of ordinary shares outstanding times the closing price at fiscal year-end

ISSUE

An indicator variable equal to one if a firm issued new debt or equity during the fiscal year, and zero otherwise

INSTOWN

Percentage of shares held by institutional investors

DQ

Chen et al.’s (2015) measure of disclosure quality in the year of the CSR record

MANFORE

The natural logarithm of the number of management forecasts in the year of the CSR record

AD

Advertising expense scaled by sales in the year of the CSR record

ATO

Asset turnover ratio, calculated as the net sales divided by total assets in the year of the CSR record

CASH

Cash scaled by total assets in the year of the CSR record

IB

Income before extraordinary items scaled by sales in the year of the CSR record

RD

The R&D expense scaled by the total sales in the year of the CSR record

DISPERSION

Analysts’ earnings forecasts dispersion in the quarter preceding the conference call date

ACCURACY

The average absolute value of analysts’ earnings forecasts minus actual earnings in the quarter preceding the conference call date, scaled by the stock price 2 days before the earnings announcement date

All continuous, non-ranked variables are winsorized at the 1 and 99% level.

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Palmon, D., Chen, Y. & Chen, B. Corporate Social Responsibility and Information Asymmetry: Do Earnings Conference Calls Play a Role?. J Bus Ethics (2024). https://doi.org/10.1007/s10551-023-05605-8

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