In Academy of Management Journal, Sengul and Yu examine competitors鈥� reactions to a firm鈥檚 negative earnings surprise
Listen closely, investors, on those earnings conference calls. If the manager reports a figure lower than expected, and then tries to bury that news under a flurry of verbiage, watch out. Because the firm鈥檚 rivals are listening too. And, smelling blood, they might soon go on the attack鈥攆or instance, by undercutting the struggling firm鈥檚 prices, or imitating one of its signature product lines.
Associate Professor Metin Sengul
That鈥檚 the finding of Metin Sengul and Tieying Yu, both associate professors in the Carroll School鈥檚 Management and Organization department, along with Wei Guo of China Europe International Business School. The trio鈥檚 research has been published in the summer issue of the Academy of Management Journal.
Plenty of studies have been done on how a firm鈥檚 own investors respond to a 鈥渘egative earnings surprise鈥� (which is when a publicly traded firm announces earnings less than the consensus forecast of security analysts). The company鈥檚 stock price drops while its cost of capital rises, among other negative effects.
Associate Professor Tieying Yu
But how do competitors respond to their rival鈥檚 misfortune? That鈥檚 the novel angle that Sengul, Yu, and Guo explored. Analyzing data from 3,202 earnings releases and conference calls of publicly listed firms between 2003 and 2014 in the U.S., they found that a firm is likely to view their rival鈥檚 lower-than-predicted earnings report as 鈥渁n opportunity to exploit its vulnerability,鈥� said Sengul.
鈥淭his is especially the case when a manager of the firm that has just experienced a negative earnings surprise uses complex or vague language in the earnings call,鈥� Sengul said. That signals that 鈥渢hey are trying to conceal their firm鈥檚 weakness.鈥�
Moreover, the scholars found that when the language in an earnings call is both complex (to the point of being 鈥渋ncomprehensible to the general public,鈥� they write) and vague (employing qualifiers and 鈥渂luffing terms鈥�), then competitors will mount even more aggressive challenges in response.
Asked about current conditions, the authors said in an email that some firms have recently taken a greater-than-expected number of 鈥渃ompetitive actions,鈥� even in the midst of daunting business challenges, and that their findings might help explain why that is happening.
A contribution to the study of communication as well as of competitive dynamics, Sengul and Yu鈥檚 full article is available at .听
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