Quarterly earnings conference calls are obnoxious. First the management teams regurgitate the press release they just issued to analysts as if the analysts couldn’t read. Then, the analysts get a turn to ask questions. But before each question is asked analysts suck up to management with praise on their astute stewardship for beating quarterly earnings guidance. Guidance that in most cases have been lowered over the course of the prior three months.
Everybody gets a trophy during quarterly earnings season!
A recent study by two Florida International University accounting professors found that over the course of a ten-year period Wall Street analysts congratulate management 3,000 times.
The FIU researchers looked at 16,000 earnings conference calls from almost 500 companies and discovered a familiar pattern. Wall Street analysts are a congratulatory bunch. Analysts sucked up to management teams an average of 2.5 times per call.
Why all the flattery? Analysts shower management teams with praise so they don’t lose access. Those analysts who are critical often get cut off from top executives. Hard to fine-tune your quarterly earnings estimates when you can no longer cheat off of the CFO’s paper.
Okay so Wall Street analysts must maintain a positive outlook on the companies they follow in public, they can’t downgrade issuers for fear of losing investment banking businesses (see here and here), and their secondary motivation is generating brokerage commissions.
Where does the best interest of the individual investor fall in this arrangement?
If you are still interested in reading the opinions of the analysts who write Wall Street’s conflict-ridden brokerage research, don’t say you weren’t warned.
The phrase “Great quarter, guys” has been uttered by analysts so often on earnings conference calls that it’s become a standing joke on Wall Street. There’s even a Twitter account, with a skeptical take on earnings news, called @greatquarter.
Jonathan Milian and Antoinette Smith, accounting professors at Florida International University, have just published a study of the language analysts use on conference calls. Because groveling to management seems to help analysts secure what’s called “corporate access,” or face time for clients with companies’ top executives, it’s no wonder that many analysts come across as bootlicking sycophants.
Analyzing more than 16,000 earnings conference calls from almost 500 companies between early 2003 and the middle of 2013, the researchers found that analysts spoke the phrase “great quarter” roughly 3,000 times. They said “good,” “great” or “strong” more than 215,000 times.
More than half of all calls included some sort of praise from analysts, ranging from “good,” “solid” or “nice” to “amazing,” “incredible,” “phenomenal,” “tremendous” and other craven flattery.
Read more here
Jeremy Jones, CFA
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