The Predictive Value of Abnormal Positive Tone in Earnings Conference Calls

Abstract: Tone in qualitative firm disclosures has increasingly caught the academic in-terest. Earnings conference calls are however a form of firm communication that largely have been overlooked in accounting research. This paper investigates the predictive properties of tone on the initial market reaction (IMR), as well as the 60 day delayed market reaction (DMR). To investigate management’s strate-gic use of tone, we construct a variable of abnormal positive tone, ABTONE, which is the residual of a tone model controlled for firm fundamentals. We find that ABTONE in the preparing remark section of the earnings conference calls predicts positive abnormal returns in both the IMR and DMR windows, which indicates that managers use tone to sincerely inform investors. To test if earnings information uncertainty affects the predictive value of tone, we compose a sample consisting of biotechnological and pharmaceutical firms as well as a corresponding sample with firms in more traditional industries. We find that the predictive value of ABTONE is considerably stronger for firms with higher earnings information uncertainty.