If The CFO Says He Feels ‘Fantastic,’ Sell Short
A study set to appear soon in the Journal of Accounting Research asks whether deceptive chief executives and chief financial officers give themselves away by the language they use in the course of their conference calls.
David F. Larcker and Anastasia Zakolyukina, both of Stanford University, Graduate School of Business, have developed prediction models (though still rather crude ones, they acknowledge) based on the “linguistic features” of such calls, working with a comprehensive set of transcripts collected by FactSet Research Systems Inc., which they compare with restatements identified by Glass Lewis. They use subsequent restatements at variance in some way with what was said during the conference call as the mark of deception.
But of course investors want to know whether the executives are speaking deceptively well before the restatement is filed. In order to help with that goal, Larcker and Zakolyukina in the paper, “Detecting Deceptive Discussions in Conference Calls,” have analyzed the transcripts, focusing especially on CEOs and CFOs because they are “the most likely executives to have knowledge about financial statement manipulation.” They have broken down communication into what they called “instances;” that is, communications (often answers to a caller’s questions) in which a CEO or a CFO spoke for more than 150 consecutive words.
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