Contextualization of Numbers in Earnings Conference Calls

ABSTRACT

Prior research generally finds that using numbers in financial disclosure is beneficial. However, numbers can also be strategically proffered due to their perceived precision and informativeness. We find the use of undercontextualized numbers in earnings conference calls is associated with short‐term benefits but negative longer‐term consequences. Specifically, undercontextualization is associated with a short‐term positive market return, positive analyst forecast revisions, and a more positive tone in analysts’ questions. Furthermore, we find undercontextualization is associated with a longer‐term negative market return, a decrease in year‐over‐year earnings, and a higher incidence of restatements. In additional analyses, we find evidence consistent with the intentional use of undercontextualization, as it is associated with conference call casting, insider trading, and internal information quality. Given the uniqueness of our measure, we provide evidence of its validity by documenting its association with analyst scrutiny and other proxies for strategic call behavior. Finally, we examine a mechanism underlying our results and find evidence that undercontextualized numbers have a greater influence on retail investors.