Playing Favorites: How Firms Prevent the Revelation of Bad News

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Paul Woolley Centre Discussion Papers No 42
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We explore a subtle but important mechanism through which firms manipulate their information environments. We show that firms control information flow to the market through their specific organization and choreographing of earnings conference calls. Firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 182 basis points per month, or over 21 percent per year. Further, firms that cast their calls have higher accruals leading up to the call, barely exceed/meet earnings forecasts on the call that they cast, and in the quarter directly following their casting tend to issue equity and have significantly more insider selling and stock option exercises.


  • Winner of First Prize, Crowell Memorial Award for Best Paper in Quantitative Investments, 2014