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Listening Without Prejudice: How the Experts Analyze Earnings Calls for Lies, Bluffs, and Other Flags


Through their words, tone of voice, and other verbal signals, executives often inadvertently reveal more than they want to. Here's what to listen for.


Earnings season has hit full-throttle, with blue chip companies Coca-Cola (KO), IBM (IBM), Intel (INTC), and Johnson & Johnson (JNJ), as well as others like Goldman Sachs (GS) and Yahoo (YHOO) all having reported their first-quarter results yesterday.

Following earnings season custom, many of these companies' CEOs and CFOs participated in conference calls in which they discussed their firms' financial results with analysts and investors.

Obviously, executives have self-interest in portraying the most flattering picture of their companies, which means that sometimes, the words of CEOs on earnings calls must be taken with a grain of salt.

Some CEOs are unable to mask the failings of their companies. In 2001, short-lived Enron CEO Jeff Skilling famously exclaimed, "Asshole!" to an analyst who questioned the now-defunct firm's financial statements.

However, most executives have been so well-trained in media relations that they would be able to successfully mask any slip-ups.

Take for example, the statements of then-Lehman Brothers CFO Erin Callan. In a March 2008 conference call, only days after Bear Stearns fell and was bought by JPMorgan Chase (JPM), Callan sought to reassure investors and analysts about the strength of Lehman, describing her firm's business with words like "strong," "great," and "incredibly" multiple times, while a word like "tough" was used only once. Of course, five months later, Lehman filed for bankruptcy, as its risky investments were brought to light.

That CEOs might be telling a fib or two on earnings calls is not news to seasoned hedge fund analysts. As IR Web Report notes, firms like Goldman and SAC Capital Advisors have long hired voice experts to analyze the voices of executives to detect if they give anything away.

One such expert is Chuck Rose, whose company, Mental Insights, helps companies conduct extensive behavioral research to achieve specific goals.

"Can we detect if someone is lying or fudging? No, we cannot," says Rose. What his company can do, instead, is to use a proprietary program to comprehensively examine quarterly and annual reports, earnings calls, news releases, speeches, regulatory filings, social media sentiment, and other documents to determine what a corporation is really saying or focusing on and how intense and consistent that focus is.

"You would look at words such as 'but,' 'if,' or anything of those things that often inadvertently get dropped in these earning calls," Rose told Minyanville when asked how one could tell if a executive is fibbing on an earnings call. "You have to look at the kind of enthusiasm executives have on the calls, and compare that enthusiasm against how they sounded in the past. If they were similarly accurate in the past, for example, then how accurate were their past statements?"

Another firm that does similar voice investigation work is Business Intelligence Advisors, or BIA, which has a team of retired CIA officers who look out for qualifiers like "honestly," frankly," or "basically," or cagey phrases such as "as I said before," or "to the best of my knowledge."

In his book, Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage, CNBC reporter Eamon Javers described, in 2005, how BIA managed to spot looming troubles at UTStarcom (UTSI) through careful analysis of statements by the company's then-CFO. The firm duly reported to its client that it believed that UTStarcom executives were distressed about future revenues. Indeed, the following quarter, the company said it would not be able to meet revenue goals and saw its stock price plunge 30%.

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