Do buy-side analysts in earnings conference calls manipulate stock prices?

In our recent study, Do buy-side analysts in earnings conference calls manipulate stock prices?, we use a unique combination of institutional trading data and conference call transcripts to shed light on why buy-side analysts participate in companies’ earnings conference calls. This is an important question because institutional investment firms can trade the stocks of the companies that host the conference calls, which means that the analysts they employ may have incentives to try to influence (i.e., manipulate) the stock price by making positive or negative comments in a public forum. The sports analogy is to throw management a “softball” question when a buy-side analyst wants to boost the stock or a “curve ball” when the analyst wants to hurt the stock. However, buy-side analysts also have incentives to acquire information during the call without an intention to influence the stock. We examine the tone of the conversations between the analysts and company executives, in conjunction with the trading patterns by the employing institutions before and after the conference call, to determine if the data is consistent with either the “stock influence” or “information acquisition” motive (or both).

Two Possible Motives

We explore the two aforementioned possible reasons for buy-side analysts to participate in conference calls. The first reason is based on information acquisition by the buy-side analysts. That is, buy-side analysts ask questions of management in the call to obtain or clarify information to help make subsequent investment decisions. They may not have opportunities to ask management questions privately or they do not mind asking their questions publicly, but in either case, their participation is fairly innocuous. We refer to the behavior in this scenario as “information acquisition,” which may be considered the null hypothesis case. A second reason, which is more inflammatory, suggests that buy-side analysts only participate in public conference calls when they want to make a company look good or bad publicly in an effort to influence the stock. For example, an institution can take a short position in a company before the call, its buy-side analyst can try to make negative comments during the call, and then the institution can cover the short-sale (i.e., buy the stock) after the call—a typical “short-sell and cover” pattern. We refer to this behavior as “stock influence.”

We note that the two behaviors described are not necessarily mutually exclusive, and we do not consider them to be strictly competing stories. It is conceivable that a buy-side analyst asks a question to acquire information about a company’s growth prospects, and in doing so, highlights the company’s growth prospects to all market participants in a positive or negative light. A buy-side analyst may also be motivated to acquire information in some conference calls but try to influence the stock in other calls. Furthermore, analysts’ behavior may vary based on the type of institutions that employ them. Institutions that hold stocks for short horizons and trade frequently or hedge funds that utilize long-short strategies may be more inclined to influence stock prices. In contrast, buy-side analysts employed by traditional buy-and-hold institutions may be more likely to question management simply to acquire information. Our goal is to investigate whether evidence from the general sample of institutions, or from subsamples of transient institutions or hedge funds, supports one or both behaviors.

Data and Research Design

To test these two reasons, we use a unique combination of data that include 10,953 earnings conference call transcripts (from as early as 2002) with names of participating sell-side and buy-side analysts (from Thomson Reuter’s StreetEvents database) and daily trade executions with names of institutional investment firms and broker-dealers that employ the analysts (from Abel Noser Solutions. We parse the conference call transcripts and measure the tone of conversation between the buy-side analysts and management during the question-and-answer portion of the calls.

Our empirical design compares an institution’s trading in a company’s stock during the quarter in which the institution’s buy-side analyst participated in the conference call to the trading by the same institution in the same company’s stock during other quarters in which the institution’s buy-side analyst did not participate in the call. This design allows us to make predictions about specific patterns of pre-call buys and sells, in-call tone (or lack of), and post-call buys and sells, which we believe align with either stock influence or information acquisition behavior. We also control for each company-quarter’s earnings news, overall company performance, the tone of dialogues between sell-side analysts and company executives, as well as include company, institution, quarter, or institution-company fixed effects in all regressions.

Results

Before discussing our findings, it is important to note two institutional factors that make it difficult to empirically detect stock influence behavior. First, company managers are reluctant to select known short-sellers or buy-side analysts from hedge funds to ask questions during the conference call, which can prevent them from making critical comments during the call. Second, hedge funds are often unwilling to provide their transactions to third-party data providers such as Abel Noser, which can hinder our ability to detect the hypothesized trading patterns in the full sample or the hedge fund subsample. With these considerations in mind, we highlight four sets of findings.

First, we estimate that participating institutions (investment firms that employ buy-side analysts who participate in companies’ quarterly conference calls), on average, have participated in the conference calls of about 10% of their invested companies at a rate of about once every five calls. Therefore, while participating institutions do not participate in every call hosted by every one of their invested companies, they are a continuing presence for many companies. Participating institutions tend to be larger, with the median total assets under management (AUM) of $373 million (averaged across all participating institutions and sample years), compared to $192 million for non-participating institutions; the comparative mean AUMs are $4.1 billion and $1.9 billion, respectively. Participating institutions include some of the most well-known investment firms such as BlackRock, Fidelity, and Vanguard. Their larger AUM likely affords greater resources to employ in-house analysts, rather than rely solely on sell-side analysts, and to hold greater stakes in each invested company (median of $7.5 million vs. $4.0 million).

Second, our analyses also reveal the interplay between conference call participation and trading surrounding the call by individual institutions. When there is participation, 0.26% of the company’s shares outstanding is traded by the institution, compared to 0.18% without participation. When there is trading, the buy-side analyst’s conversation with management is 9% longer (as measured by the number of words spoken by each side) and 10% more positive in tone. Although these findings do not in themselves shed light on the reason (stock influence or information acquisition) for the buy-side analyst’s participation nor signal opportunistic behavior in any way, we view them as a validation of the basic notion that participation signals an institution’s interest in trading a company’s stock immediately around the conference call, which, while not surprising, has yet to be documented in prior studies.

Third, when examining how pre-call trades and buy-side tone are related to post-call trades, we find a pattern of pre-call sells by an institution, negative tone between that institution’s buy-side analyst and company management during the call, and post-call buys by the same institution, consistent with a “short-sell and cover” type of stock influence behavior. In a subsample of hedge funds, we find a pattern of pre-call buys, negative tone, and post-call buys, consistent with a “buy more at depressed prices” type of stock influence behavior. However, we also find evidence of information acquisition behavior in the general sample, likely driven by traditional long-only, buy-and-hold institutions.

Fourth, we examine whether the interaction of buy-side analyst tone during the call and post-call net buying or net selling by the employing institution is associated with the hosting company’s future stock returns. We find a pattern of positive tone with post-call net sells (“pump and dump” and/or “sell more at inflated prices”) and lower future returns, consistent with return reversal after stock influence behavior. But again, we also find evidence of information acquisition behavior in which buy-side tone, post-call net buying, and future returns are positively correlated.

Conclusion  

In sum, we are able to detect some trading patterns, in conjunction with buy-side analyst tone in conference calls, that are consistent with stock influence behavior. This evidence, to the best of our knowledge, is the first to be observed from large-scale archival data rather than from anecdotes of survey interviewees. However, we also detect possibly broader evidence consistent with the null hypothesis of information acquisition behavior, which runs counter to anecdotes that buy-side “never” ask questions in public without an ulterior motive. Overall, we surmise that both behaviors existing in this setting, with traditional long-only, buy-and-hold institutions more likely to engage in information acquisition while hedge funds and transient institutions more likely to engage in stock influence. The evidence we provide on each behavior should be of interest to firm managers who host conference calls, market participants who use conference calls to collect company information, as well as regulators who monitor for possible market manipulation.