Following an earnings announcement or a piece of company news, the most common question that crosses shareholders’ minds is likely to be “what will the shares do?”. The most common instinct would be to think that if good news is announced, the market will price in this new information and the shares will go up. Investors will be willing to pay a bit more for these shares if the news signals that the expected future cash flows will be higher than previously thought. The opposite goes for bad news.
As the management team of a public company, one of your responsibilities is to maximise shareholder value. You will try to ensure the share price remains on a steady trajectory upwards, ideally, or at least does not drop too much. This could entail softening the blow of an unfavourable earnings announcement when talking to analysts. As an equity analyst making buy, hold, or sell recommendations, it’s in your interest to remain on reasonably good terms with the management teams of the companies you cover in order to maintain access to information about this company, and be able to freely ask management teams any questions you have.
Sometimes the age-old advice of ‘lead with a joke’ rings true. In their paper ‘Analysts’ and Managers’ Use of Humour on Public Earnings Conference Calls’, researchers from Arizona State University, Texas A&M University and the University of Georgia analysed the transcripts of 85,973 conference calls regarding the earnings announcements of public companies between 2003 and 2016, and found that the use of humour in public earnings conference calls has economically meaningful implications.