In Academy of Management Journal, Sengul and Yu examine competitors’ reactions to a firm’s negative earnings surprise
Listen closely, investors, on those earnings conference calls. If the manager reports a figure lower than expected, and then tries to bury that news under a flurry of verbiage, watch out. Because the firm’s rivals are listening too. And, smelling blood, they might soon go on the attack—for instance, by undercutting the struggling firm’s prices, or imitating one of its signature product lines.
That’s the finding of Metin Sengul and Tieying Yu, both associate professors in the Carroll School’s Management and Organization department, along with Wei Guo of China Europe International Business School. The trio’s research has been published in the summer issue of the Academy of Management Journal.
Plenty of studies have been done on how a firm’s own investors respond to a “negative earnings surprise” (which is when a publicly traded firm announces earnings less than the consensus forecast of security analysts). The company’s stock price drops while its cost of capital rises, among other negative effects.
But how do competitors respond to their rival’s misfortune? That’s the novel angle that Sengul, Yu, and Guo explored. Analyzing data from 3,202 earnings releases and conference calls of publicly listed firms between 2003 and 2014 in the U.S., they found that a firm is likely to view their rival’s lower-than-predicted earnings report as “an opportunity to exploit its vulnerability,” said Sengul.
“This is especially the case when a manager of the firm that has just experienced a negative earnings surprise uses complex or vague language in the earnings call,” Sengul said. That signals that “they are trying to conceal their firm’s weakness.”
Moreover, the scholars found that when the language in an earnings call is both complex (to the point of being “incomprehensible to the general public,” they write) and vague (employing qualifiers and “bluffing terms”), then competitors will mount even more aggressive challenges in response.
Asked about current conditions, the authors said in an email that some firms have recently taken a greater-than-expected number of “competitive actions,” even in the midst of daunting business challenges, and that their findings might help explain why that is happening.
A contribution to the study of communication as well as of competitive dynamics, Sengul and Yu’s full article is available at the Academy of Management's website.
—Carroll School News