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How to Tell When a CEO is Lying

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After studying thousands of corporate earnings calls, David Larcker, a professor of accounting at Stanford University's Graduate School of Business and Ph.D. student Anastasia Zakolyukina have come up with an algorithm that can predict fairly accurately when a CEO is lying.

Larcker and Zakolyukina studied the words used by executives at companies that later had to restate earnings, which often happens after fraud has occurred.

Zakolyukina said  that lying executives tend to overuse words like "we" and "our team" when they talk about their company. They avoid saying "I."

She says, "If I'm saying 'I' or 'me' or 'mine,' I'm showing my ownership of the statement, so psychologically I'm showing I'm responsible for what I'm saying."

They also point out that "Lying CEOs also tend to use a lot of words that express positive emotion — things are fabulous and fantastic and extraordinary."

Former Enron CEO Ken Lay is used as an example:

"Here's what Enron CEO Kenneth Lay said when he addressed his employees at a time when the company was about to implode: 'I think our core businesses are extremely strong. We have a very strong competitive advantage. Of course, we are transferring this very successful business model and approach to a lot of new, very large markets globally.'"

Larcker says, "If all my speech is 'fantastic,' 'superb,' 'outstanding,' 'excellent' and all my speech sounds like a big hype — it probably is."

So, Larcker and Zakolyukina put their data into a computer model that can issue red flags when signs of deception occur.

However, the question now becomes, how long will it be before every CEO of every publicly-traded company purchases the software to practice with before every earnings call?
POSITION:  No positions in stocks mentioned.
TAGS:  CEO, DECEPTION, LYING, KEN LAY    SOURCE:   NPR

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