From the WSJ's Deal Journal:
Conference call Q&As are a confusing and cryptic dance. Executives try to be attractive to investors, without giving away too much. In many cases, they are trying to put a good spin on bad results.
But what if an investor could read right through all of the posturing and careful prose to know if they were being strung along?
A pair of professors at Stanford recently tried to do just that. The team built a model that tries to flush out executive lies, using psychological and linguistic studies and transcripts of conference calls from companies that later restated earnings.
They fed their filter almost 30,000 earnings transcripts from 2003 to 2007 and found that it worked quite nicely. Executives who later had to revise their books displayed some very consistent clues.
For one, they seldom referred to themselves or their firms in the first person; “I” and “we” were replaced by terms like “the team” and “the company.” Deceitful executives passed up humdrum adjectives like “solid” and “respectable” in favor of gushing words like “fantastic,” and (not surprisingly) they seldom mentioned shareholder value....MORE