Practical Applications of How Do Corporate Managers Explain Quarterly Earnings?

In How Do Corporate Managers Explain Quarterly Earnings? from the August 2023 issue of The Journal of Investing, Edward Aw, Gregory Sivin, and Konstantin Tcherepachenets (all of Bessemer Trust) find that corporate managers are influenced by different biases when explaining earnings surprises and misses. When explaining upside surprises, corporate managers are often prone to self-attribution bias, whereby they attribute success to their own skills. On the other hand, corporate managers suffer from a denial bias when reporting downside earnings surprises, as they attribute failures to external events and deny direct responsibility. When providing future expectations, corporate managers display an optimism bias, which may be amplified by a recency bias if the company has experienced recent success. The authors argue that securities analysts are in a better position to assess newly announced information when analysts are aware of the corporate manager's motivation during an earnings call.