Though Lehman's results were already calming market fears, a great deal was still riding on her performance. Surely everyone listening in would ask the same questions: How was Lehman different from Bear Stearns? How strong was its liquidity position? How was it valuing its real estate portfolio? Could investors really believe Lehman's "marks" (the way the firm valued its assets)? Or was Lehman playing "mark-to-make-believe"?
[Lehman Chief Financial Officer Erin] Callan had answers to all of them. She had prepped and studied and gone through dry runs. She had even rehearsed the numbers for a roomful of Securities and Exchange officials—hardly the easiest crowd—over the weekend, and they had left satisfied. She knew the numbers cold; she knew by heart the story that needed to be told. And she knew how to tell it. — Too Big to Fail
In a memorable passage from his account of the financial crisis, Andrew Ross Sorkin sets the stage for Lehman Brothers' crucial quarterly conference call at which Chief Financial Officer Erin Callan was ready to be peppered with questions on the state of the company in March 2008, just weeks after the collapse of rival Bear Stearns.
The stock ripped to the upside amid the better-than-expected results and Callan's soothing performance. Had the CFO's impeccable preparedness been gleaned by investors, however, they should have taken it to be yet another red flag.
That's the upshot of a paper from Joshua Lee, assistant professor at Florida State University, whose study suggests that "investors interpret scripted Q&A negatively and that analysts revise their forecasts downward following calls with scripted Q&A."
If an executive team is keeping its cards close to the chest, perhaps the company has something to hide, Lee posits in the paper published by The Accounting Review.
"By adhering to a script, managers can circumvent the extemporaneity of the Q&A and avoid the costs of unintentionally disclosing bad news," he wrote, pointing out that his findings suggest this approach backfires.
Immense planning for quarterly calls is time the C-Suite, legal department, and public relations team could've spent doing something else—and thus represents a cost to the company. Moreover, a stiff, rehearsed performance in a question-and-answer session can leave the listener with the impression that management doesn't understand the business well enough to think on their feet, Lee adds.
The professor analyzed differences in speech patterns and styles between the management discussion portion of conference calls (which is typically scripted) and the question-and-answer session to get a handle on whether management were serving up canned responses to the analyst community.
"Research suggests that stylistic properties of speech naturally differ between written and spontaneous language," explained Lee.
Lee found companies that utilize a scripted Q&A tend to have worse returns on the day of and 90 days following these calls and are likely to see bid-ask spreads widen as well as analysts' earnings estimates come under pressure over the next month.
"These results suggest that the negative market reaction to scripting is likely due to the signal it provides about future performance and not due to the greater levels of information provided in the call about the future performance," he wrote.
Something to keep in mind after Alcoa unofficially kicked off the fourth-quarter earnings season on Monday.