Rev Account Stud (2010) 15:220–242

DOI 10.1007/s11142-009-9089-4

Do pennies matter? Investor relations consequences

of small negative earnings surprises

Richard Frankel Æ William J. Mayew Æ Yan Sun

Published online: 28 February 2009

Ó Springer Science+Business Media, LLC 2009

Abstract Anecdotal and survey evidence suggest that managers take actions to
avoid small negative earnings surprises because they fear disproportionate, negative
stock-price effects. However, empirical research has failed to document an asym-
metric pricing effect. We investigate investor relations costs as an alternative
incentive for managers to avoid small negative earnings surprises. Guided by CFO
survey evidence from Graham et al. (J Account Econ 40:3–73, 2005), we opera-
tionalize investor relations costs using conference call characteristics—call length,
call tone, and earnings forecasting propensity around the conference call. We find an
asymmetric increase (decrease) in call length (forecasting propensity) for firms that
miss analyst expectations by 1 cent compared with changes in adjacent 1-cent
intervals. We find no statistically significant evidence that call tone is asymmetri-
cally more negative for firms that miss expectations by a penny. While these results
provide some statistical evidence to confirm managerial claims documented in
Graham et al. (J Account Econ 40:3–73, 2005) regarding the asymmetrically neg-
ative effects of missing expectations, our tests do not suggest severe economic
effects.

Data availability The data used in this study are from the public sources identified in the text.

R. Frankel (&)
Olin School of Business, Washington University in St. Louis, Campus Box 1133,
One Brookings Drive, St. Louis, MO 63130, USA
e-mail: frankel@wustl.edu

W. J. Mayew
Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708, USA
e-mail: wmayew@duke.edu

Y. Sun
John Cook School of Business, Saint Louis University, 3674 Lindell Boulevard, St. Louis,
MO 63108, USA
e-mail: ysun4@slu.edu

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Do pennies matter? 221

Keywords Investor relations
Earnings benchmarks
Conference calls

Analysts

JEL Classification M41
G14

1 Introduction

We study whether a penny of earnings per share has more significant investor-
relations effects when it makes the difference between meeting and missing analyst
expectations. We compare changes in earnings-conference-call characteristics that
occur as the earnings realization varies by a few cents around the consensus analyst
expectation. These characteristics include call length, call tone, and issuance of
management-earnings guidance around the conference call.
Prior literature suggests that managers take actions to avoid small negative
earnings surprises (Burgstahler and Dichev 1997; Degeorge et al. 1999; Burgstahler
and Eames 2006). To explain why managers attempt to meet earnings benchmarks,
researchers have studied the capital market consequences of missing benchmarks.
Skinner and Sloan (2002), Hand (2002) and Kinney et al. (2002) examine the stock
price response to small earnings surprises and find little support for the idea that
firms are disproportionately penalized for just missing analyst expectations.1
However, survey research by Graham et al. (2005) indicates that CFOs believe that
the capital market penalties associated with missing analyst expectations are so
severe that they are willing to forgo positive-net-present-value projects for a few
added pennies of earnings per share. The CFOs claim that missing the benchmark
by small amounts raises concerns of deeper problems and causes investors to doubt
both the firm’s prospects and the managers’ abilities. These misgivings force
managers to devote additional time and resources to restore credibility and convey
the firm’s current financial condition to investors. CFOs cited by Graham et al.
(2005) note that the effects of small misses are especially visible during conference
calls with analysts.
We use earnings conference calls to measure the magnitude of these investor-
relations consequences and thereby provide evidence on the investor-relations
motivation for managers to meet benchmarks. Conference calls provide a window
into investor-manager discussions, are directly associated with earnings announce-
ments, and have been shown by research to convey economically material
information to investors (for example, Tasker 1998; Bushee et al. 2003; Frankel
et al. 1999; Bowen et al. 2002, Brown et al. 2004). While longer and more negative
discussion with analysts may not by itself be costly to the firm, we view call length

1
For example, in Skinner and Sloan (2002), the market’s reaction to forecast errors (i.e., actual earnings
minus the consensus analyst forecast) for growth stocks is quite symmetrical for forecast errors between
zero and -0.7% of price and zero and 0.7% of price, suggesting no disproportionate penalty for small
earnings misses. Forecast errors exceeding ±0.7% of price are not small misses. A growth stock with a
price earnings ratio of 40 implies that quarterly earnings are 0.625% of price. Thus missing by 0.7% of
price implies a forecast error of 112% of reported earnings.

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222 R. Frankel et al.

and tone as proxies for the information demands of investors and the prevailing state
of relations between the firm and its investors.
Our sample contains 20,511 firm-quarter conference calls, representing 3,041
unique firms and is obtained from the Thomson Financial StreetEvents database
between June 2001 and March 2005. Our dependent variables are (1) conference
call length, (2) the scaled difference between the number of positive and negative
words used during the call, and (3) an indicator variable set to one when the firm
issues an earnings forecast in the 3 days centered on the conference call. Our
experimental independent variables are a set of 0/1 variables, indicating the
difference between I/B/E/S earnings and I/B/E/S consensus estimates in pennies.
For example, the indicator variable miss1 is set equal to one when I/B/E/S actual
earnings is 1 cent below the I/B/E/S consensus. Our purpose is to test whether a
penny of earnings has a larger effect when it makes the difference between missing
and just meeting analyst expectations. Thus, our primary statistical tests examine the
differences in the differences of the coefficients on our indicator variables. In
particular, we test whether firm-quarter observations in the miss1 and miss0
categories exhibit a larger difference in the dependent variables than firm-quarter
observations in the miss2 and miss1 categories or observations in the miss0 and
make1 categories.2

1.1 Findings

We find that the reduction in conference call length between firms just missing
expectations and firms meeting expectations is significantly larger than the difference
in surrounding earnings surprise intervals. Firms that miss expectations by 1 cent have
calls that are 1.1 minutes longer than firms that meet expectations. In contrast, moving
from beating expectations by 1 cent to just meeting is associated with a 0.23 minutes
decrease in call length, while moving from missing by 1 cent to missing by 2 cents is
associated with a 0.82 minutes decrease in call length. Thus, we find an asymmetric
‘‘miss-by-a-penny effect’’ on call length—the increase in call length is greater when a
firm moves from just meeting the expectation to missing by a penny compared with
the changes associated with movements in the adjacent intervals.
The results of Graham et al. (2005) suggest that the investor-relations
consequences of missing expectations are more pronounced for firms with larger
analyst following. Our call length results are consistent with this notion. We find
that the miss-by-a-penny effect on conference call length is more pronounced for
firms with ample analyst following.
However, the economic consequences of missing by a penny are not severe. The
average call length in our sample is approximately 51 minutes. The 1.1 minutes
increase in call length for firms that just miss expectations compared with firms that
meet expectations thus represents a small percentage increase in call time.

2
miss0 denotes firm quarters where I/B/E/S actual earnings are equal to analyst expectations. make1
denotes firm quarters where I/B/E/S actual earnings exceed analyst expectations by 1 cent. miss2 denotes
firm quarters where analyst expectations exceed I/B/E/S actual earnings by 2 cents. For brevity, we use
‘‘I/B/E/S earnings’’ to denote ‘‘I/B/E/S actual earnings’’ for the remainder of the paper.

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Do pennies matter? 223

Graham et al. (2005) suggest that the tone of the conference call dialog becomes
excessively negative when firms miss earnings expectations. We find that call tone,
as measured by the use of positive versus negative language in the conference call
dialog, improves as firm performance improves relative to analyst expectations.
However, we do not find a ‘‘miss-by-a-penny effect’’ on call tone using the overall
sample or after dividing the sample based on analyst following.
Graham et al.’s (2005) survey results also imply that just missing earnings targets
affects the probability that a firm will provide future earnings guidance. CFOs say
that missing expectations forces them to spend more time explaining past
performance, suggesting that missing expectations reduces the probability of
forecasting earnings. This imposes a cost on the firm if uncertainty about future
prospects cannot be adequately resolved. We find that firms missing expectations
have a significantly reduced probability of issuing earnings forecasts in the days
surrounding the conference call. More importantly, we find asymmetry in the effect
of missing expectations on forecasting. The probability of forecasting decreases
significantly more when moving from miss0 to miss1 (a decrease of 3.2%) than
moving from miss1 to miss2 (an increase of 3.1%) or from miss0 to make1 (an
increase of 2.1%). Evidence after partitioning the data on high and low analyst
following generally confirms that these results are driven by firms with high analyst
following.
Overall, the data provide some statistical evidence to reject the null hypothesis of
no asymmetry in investor-relations effects associated with missing expectations as
suggested by the survey results of Graham et al. (2005). However, the economic
consequences are minor. In this respect, our results are consistent with prior stock
return findings suggesting that there is little incremental investor-driven cost
associated with just missing analyst expectations.

1.2 Caveats

Firms exercise some control over whether they meet analyst expectations because
they can manipulate reported earnings or guide expectations. This fact is often cited
as one reason why missing expectation even by a penny indicates significant
underlying problems (e.g., Graham et al. 2005; Lipschutz 2000). If we assume that
firms will use this control to avoid missing expectations when consequences are
most severe, then our tests provide a lower bound for these expected consequences.
From an equilibrium perspective, our results suggest either that the cost of
managing analyst expectations is minimal or that the investor-relations conse-
quences of missing expectations are minimal.

2 Hypotheses

We use CFO comments from survey data compiled by Graham et al. (2005) to
operationalize investor relations consequences and test for their variation around
small negative earnings surprises. In Graham et al. (2005), CFOs state that just
missing expectations (1) requires additional time to explain why the firm missed the

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224 R. Frankel et al.

benchmark, (2) makes the tone of the call dialog become negative, and (3) reduces
CFOs’ ability to discuss the firm’s future prospects as analyst demand shifts toward
understanding precisely why the managers were unable to meet the earnings
target.3,4 These comments yield the following hypotheses (stated in alternative
form):
H1 The increase in conference call length when moving from meeting expecta-
tions to missing by a penny is significantly larger than increases in adjacent one-cent
intervals.
H2 The improvement in conference call tone when moving from missing
expectations by a penny to meeting expectations is significantly greater than the
improvement in adjacent 1-cent intervals.
H3 The increase in the tendency of firms to issue earnings forecasts when moving
from missing analyst expectations by a penny to meeting expectations is
significantly larger than the increases in adjacent 1-cent intervals.
We focus on 1-cent misses because research in this area (e.g. Skinner and Sloan
2002; Graham et al. 2005) suggests investors believe that if managers cannot ‘‘find
the money’’ necessary to beat expectations, significant underlying problems exist.
This belief is based on the idea that managing earnings by a few cents involves little
cost. However, this cost grows as the amount of the miss increases (Burgstahler and
Eames 2006). Therefore, we focus on the smallest miss possible, 1 cent, for our
tests.5
A visual depiction of the hypotheses is provided in Fig. 1. Hypothesis 1 is
graphically illustrated in Fig. 1, Panel A.6 If missing expectations has negative
investor relations consequences, we expect conference calls to be longer when firms
just miss expectations compared with when they just meet expectations (That is, b3–
b4 [ 0). Additionally, if missing expectations by 1 cent has a pronounced negative
effect on investor relations, we expect a large difference between missing and
meeting expectations relative to the adjacent intervals. That is, b3–b4 [ b2–b3 and
b3–b4 [ b4–b5. Checking the significance of these inequalities is the objective of

3
Of course, a firm has the discretion to issue guidance outside of the hours of the conference call if
analyst questions constrain the manager from doing so during the conference call. In our empirical
specification, we examine managerial issuance of guidance in the 3-day window centered on the
conference call to accommodate this potential substitution effect.
4
Brown et al. (2006) provide some evidence consistent with CFO concerns that overall uncertainty about
firm prospects increases when a firm misses earnings. In particular, they show increases in cost of capital
(as proxied by the probability of informed trading) when firms miss earnings. Our investigation provides a
potential explanation for their result, i.e., management is unable to discuss future earnings.
5
Research finds that accruals are used to achieve earnings targets only when earnings targets are defined
in terms of 1-cent intervals (Ayers et al. 2006), suggesting that a 1-cent definition of ‘‘small’’ is the most
powerful setting to perform our empirical tests.
6
This figure assumes that conference call length is inversely related to earnings surprise. That is,
conference calls get longer as earnings surprise becomes more negative. In the process of testing H1, we
also offer evidence with regard to empirical validity of this assumption.

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Do pennies matter? 225

our empirical tests. Alternatively, the null hypothesis would imply a negative linear
relation with equal slopes between all forecast errors in our test region, as depicted
by the dotted line in Fig. 1 Panel A.7
Similar logic can be applied to the hypothesis regarding conference call tone and
forecasting propensity. Figure 1, Panel B, shows that we expect tone to drop most
significantly as forecast errors move from meeting to missing by one penny instead
of a linear relation across all forecast errors. In Panel C of Fig. 1, we expect a larger
decrease in forecasting tendency for firms just missing expectations relative to
adjacent changes.

3 Data and experimental design

We collect all quarterly earnings conference call transcripts available on the

Thomson StreetEvents database from its inception in June 2001 through March
2005 with related coverage on I/B/E/S. This yields 26,662 firm-quarter conference
call observations. We then remove 1,274 observations that lack necessary data on
Compustat or CRSP to compute the control variables in our subsequent analysis.
The use of conference call characteristics in the previous quarter as a control
variable further reduces the sample by 4,877 firm quarters. This yields a final
sample of 20,511 quarterly conference call observations, representing 3,041
unique firms. The sample exhibits wide variation across industries and mirrors the
distribution of industries populated by the entire Compustat universe from 2002
through 2005.
Our sample also exhibits an important characteristic consistent with the literature
that underpins the motivation for our study. Figure 2 shows that the distribution of
forecast errors in our sample period displays the familiar kink at 1-cent misses
relative to what would be expected with a smooth, symmetrical distribution around
zero forecast errors (Degeorge et al. 1999; Burgstahler and Eames 2006). If one
views this distribution as evidence of managerial attempts to exceed thresholds, then
our focus on forecast errors that miss consensus by 1 cent identifies those managers
who could not ‘‘find the money’’.8

7
These inequalities imply that under our hypothesis, b3 will reside above the midpoint between the
adjacent bin coefficients b2 and b4, and b4 will reside below the midpoint between the adjacent bin
coefficients b3 and b5. Under the null hypothesis, b3 and b4 will not differ from the midpoints between
adjacent bins.
8
Durtschi and Easton (2005) challenge the notion that kinks in earnings distributions in and of
themselves are evidence of managers achieving earnings targets. They caution that scaling and analyst
optimism/pessimism could yield a kink in the distribution of earnings. In addition, Beaver et al. (2007)
suggest that taxes contribute to the discontinuity in the earnings distribution around zero. Our study
provides insights into this debate by looking for asymmetric conference call characteristics for firms just
missing and just meeting earnings targets because a discontinuity that results from scaling or taxes should
not produce investor-relations consequences.

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226 R. Frankel et al.

Fig. 1 Hypothesized relations between conference call characteristics and analyst forecast error. Panel A
relation between call length and analyst forecast error under hypothesis 1. Panel B relation between call tone
and analyst forecast error under hypothesis 2. Panel C relation between propensity to issue earnings guidance
and analyst forecast error under hypothesis 3. These figures illustrate the hypothesized relation between
analyst forecast errors and our three main dependent variables of call length (MIN_CALL), call tone
(CALLNETPOS), and the issuance of earnings guidance in the 3 days around the conference call (BUNDLE).
miss2 is an indicator for firm quarters where actual earnings are less than consensus forecasts by 2 cents.
miss1 is an indicator for firm quarters where actual earnings are less than consensus forecasts by 1 cent. miss0
is an indicator for firm quarters where actual earnings are equal to consensus forecasts. make1 is an indicator
for firm quarters where actual earnings are greater than consensus forecasts by 1 cent

To examine the relation between earnings surprises and conference call

characteristics, we estimate the following three cross-sectional models to test our
three hypotheses for firm i at quarter t:

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Do pennies matter? 227

3500

3000
Number of Firm Quarters

2500

2000

1500

1000

500

0
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

Earnings Surprise (in cents)

Fig. 2 The frequency distribution of earnings surprises. This figure presents the frequency distribution of
earnings surprises (in cents) defined as actual earnings per share minus consensus analyst earnings
forecasts. The graph is based on 20,511 firm-quarters from June 2001 to March 2005, with an earnings
conference call transcript available on the Thomson Financial StreetEvents database and with necessary
data to compute variables used in the regression analysis of this paper. Firm-quarters with an earnings
surprise greater than ?10 cents or smaller than -10 cents are omitted from the figure but not from the
analysis

MIN CALLit ¼ b0 þ b1 missge3it þ b2 miss2it þ b3 miss1it

ð1Þ
þ b4 miss0it þ b5 make1it þ b6 make2it þ controlsit þ eit
CALLNETPOSit ¼ a0 þ a1 missge3it þ a2 miss2it þ a3 miss1it
ð2Þ
þ a4 miss0it þ a5 make1it þ a6 make2it þ controlsit þ nit
PrðBUNDLEit Þ ¼ c0 þ c1 missge3it þ c2 miss2it þ c3 miss1it þ c4 miss0it
ð3Þ
þ c5 make1it þ c6 make2it þ controlsit þ tit

In model (1), the dependent variable, MIN_CALL, is the duration of the entire
conference call measured in minutes. The experimental variables of interest are
earnings surprises. We form earnings surprise indicator variables based on the
difference between the last available summary I/B/E/S pre-split-adjusted consensus
mean earnings forecast before the conference call and reported pre-split-adjusted
earnings.9 We estimate separate intercepts for six earnings forecast error levels:
misses greater than or equal to 3 cents (missge3), miss by 2 cents (miss2), miss by 1
cent (miss1), meeting analyst expectations (miss0), beating expectations by 1 cent
(make1), and beating by 2 cents (make2). The coefficients on these forecast-error

9
We use pre-split-adjusted consensus earnings to provide a more precise measure of earnings surprise in
the presence of stock splits. See Doyle et al. (2006), Baber and Kang (2002) and Payne and Thomas
(2003) for more discussion.

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228 R. Frankel et al.

indicators represent the incremental effect relative to the base case of beating
analyst expectations by at least 3 cents.
By definition, analyzing the miss-by-a-penny effect requires that we examine the
miss1 category. However, we limit our comparison groups to the 1-cent intervals
immediately adjacent to the 1-cent miss interval for a number of reasons. First, we
want to hold constant other earnings properties (such as persistence, excessive
dispersion in earnings forecast estimates, big baths, signaling) that can vary with the
magnitude and sign of the earnings surprise (see respectively Freeman and Tse
1992; Kinney et al. 2002; Burgstahler and Eames 2006; Doyle et al. 2006.) This
design choice follows the extant literature (e.g. Dechow et al. 2003; Burgstahler and
Eames 2006; Ayers et al. 2006). Second, as a practical matter, 51% of the sample
forecast error observations lie within ±2 cents of actual earnings. As Fig. 2
illustrates, the number of observations contained in bins outside of this range
decreases quickly as the magnitude of the forecast error increases, thereby limiting
the power to find effects outside of the ±2-cent forecast error bins.
Model (1) also contains a large set of control variables suggested by the
literature. Investors demand information to supplement earnings when firms are in
financial distress or are experiencing losses (Chen et al. 2002; Defond and Hung
2003). Therefore we include an indicator variable (LOSS) that equals one when
quarterly earnings is negative. We also control for firm performance by calculating
the firm’s return on sales (ROS) for the quarter, the cumulative abnormal stock
return over the 90 days before the call (RET), and the percentage of losses over the
previous eight quarters (FLOSS).
Chen et al. (2002) find that investors demand, and managers provide, additional
information in volatile environments and during merger activities. Therefore, we
include variables for stock return volatility over the 90 days before the conference
call (VOL) and the absolute change in seasonal return on sales (ABS_ROS_CH). We
also control for merger activities with an indicator variable (MA) that equals one if
the firm engages in merger or acquisition activity per the Securities Data Corporate
database between the most recent fiscal year end and the current fiscal quarter end.
Frankel et al. (1999) and Tasker (1998) show that firm size, analyst following,
external financing, institutional ownership levels, extent of intangible assets, and
growth options are associated with voluntary managerial disclosures. As such, we
include the natural log of the firm’s market capitalization at quarter end (LNMVE),
analyst following before the earnings announcement (HIGHANAL), an indicator
variable for whether the firm raises capital in the year after the conference call
(CAPITAL), the percentage of institutional holding as of the most recent calendar
quarter before the conference call (PERCINT), the ratio of intangible assets to total
assets as of the most recent fiscal year end (INTAN), and the ratio of the book value
to market value of equity at quarter end (BTM).
Unusual or infrequent earnings components may require additional explanation
from management. We proxy for such components by measuring the price scaled
difference between actual GAAP earnings per Compustat and I/B/E/S pre-split
adjusted reported earnings (ABS_DEXC) (Doyle et al. 2003). Prior research also
suggests that legal liability leads managers to preempt bad news (Skinner 1994). We

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Do pennies matter? 229

proxy for legal liability with an indicator set to one for firms in high-litigation-risk
industries (LIT).
If managers guide analysts to control expectations (Matsumoto 2002), investors
might demand more explanation from a missed forecast. To control for this effect,
we include an indicator (CIG) that equals one if the company issued guidance for
the current fiscal quarter during the 30 days leading up to the 2 days before earnings
announcement.
We control for the potential for fourth quarter earnings calls to be longer due to
the availability of year-over-year comparable information and year-end adjustments
using the fourth quarter indicator variable Q4. We also control for the timing of the
conference call, noting that after-hour calls can be shorter than calls during trading
hours (AFTCLOSE). Finally, we control for whether the company issued any
forward-looking guidance during the 3 days centered on the earnings announce-
ment. Hutton et al. (2003) suggest that more details are required to make a good
news forecast credible, which likely translates into more overall disclosure. We
proxy for the existence of forward-looking earnings guidance with an indicator that
equals one if the firm issued guidance about future earnings during the 3 days
centered on the conference call date (BUNDLE). To control for other unobservable
variables that affect a firm’s conference call characteristics, we also include the
value of the dependent variable in the previous quarter. For example, in model (1)
for call length, MIN_CALL, we include PQMIN_CALL as an independent variable.
In model (2), the dependent variable, CALLNETPOS, captures the tone of the
language used in the conference call. We construct our tone measure as the
difference between the number of positive and negative words spoken during the
conference call, scaled by the total number of words spoken during the conference
call (Davis et al. 2007, Tetlock et al. 2008). A more positive value of CALLNETPOS
implies that a conference call’s tone is more positive. We rely on the Harvard-IV
psychosocial dictionary word classifications labeled POSITIV (NEGATIV) to
categorize positive (negative) words in each conference call transcript. This
dictionary has been used extensively by psychologists employing a well-known
semantic textual analysis program called the General Inquirer.10 In the finance
literature, the General Inquirer has been used to measure variation in the tone of
media stories to study the relation between tone and stock returns and accounting
fundamentals (Tetlock 2007; Tetlock et al. 2008).
In model (3), the dependent variable, BUNDLE, is an indicator variable equal to
one when the firm issues earnings guidance about the future during the 3 days
centered on the earnings conference call and zero otherwise.11 In estimating model

10
The Harvard-IV dictionary definitions on the General Inquirer’s web site provide a complete word list
http://www.wjh.harvard.edu/*inquirer/.
11
We use the First Call database to assess whether future earnings guidance was issued. Identifying
whether the firm discussed future earnings guidance specifically during the conference call is
prohibitively costly as it would require the reading of entire transcripts for our sample firms. However,
even in the event we were able to identify whether firms issued guidance during the conference call and
found results consistent with H3, an alternative hypothesis could be that managers are not really
constrained and simply issue guidance outside of the conference call window. Using the three-day
window centered on the conference call provides a more comprehensive test.

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230 R. Frankel et al.

(3), we include the same set of control variables as in models (1) and (2) but remove
BUNDLE as a control variable. The literature provides little guidance on the
determinants of providing forward-looking guidance around the conference call. As
part of a broader research question, Atiase et al. (2005) model the choice to issue
guidance in the presence of earnings announcements. Most of the determinants of
their model are already included as part of our control variables.12

4 Results

We report the descriptive statistics of the sample in Table 1. The average

conference call is 50.62 min in length and exhibits positive tone, with 3.45% of the
words spoken being net positive linguistically. Approximately 31.8% of sample
observations provide future earnings guidance around the conference call. The
dependent and control variables exhibit substantial variation.

4.1 Relation between earnings surprises and conference call length

To investigate the relation between earnings surprises and conference call length,
we estimate model (1) and report the results in Table 2, Column A. We find that
relative to firms that beat consensus analyst forecasts by at least 3 cents, firms
missing expectations by one penny (miss1) and firms missing by at least 3 cents
(missge3) have significantly longer calls. The coefficients on miss0 and make1 are
not significant, and the coefficient on make2 is statistically negative. Combined,
these results imply that when partitioning firms on only the miss versus meet/beat
dichotomy, firms that miss have longer conference calls as shown in Matsumoto
et al. (2006).
Turning to the specific tests of our hypotheses, we predict that a move from miss1
to miss0 is associated with a larger reduction in call length than a move in adjacent
intervals (Hypothesis 1). To test this prediction, we examine whether the coefficient
on miss1 is greater than that on miss0 (Test1) and whether the difference between
these two coefficients are greater than the differences between the coefficients on
earnings surprises in adjacent 1-cent intervals (Tests 2 and 3). These three tests are
illustrated in Fig. 1 as b3–b4 [ 0, b3–b4 [ b2–b3, and b3–b4 [ b4–b5, respectively.
We find that the conference calls for firms missing expectations by 1 cent are longer
than those for firms just meeting expectations by 1.1 minutes (miss1–miss0 = 1.1,
p = 0.00). Moreover, the increase in call length between miss0 and miss1 is larger
than changes in adjacent intervals. In fact, call length increases as we move from
miss2 to miss1 and as we move from miss0 to make1. The results for all three tests
are significant (p = 0.00, 0.01 and 0.01, respectively). Overall the evidence

12
Atiase et al. (2005) include in their analysis the sign and magnitude of the guidance issued as well as
whether the sign of the guidance was consistent or inconsistent with the sign of the earnings surprise. By
construction, their analysis requires point and range estimates of future earnings so as to quantify
guidance surprises. We do not require this restriction and therefore do not measure the sign or magnitude
of the earnings guidance because we are concerned with whether guidance was issued, instead of the
precision of the guidance issued.

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 Table 1 Descriptive statistics
Variablea Mean SD Q1 Median Q3

MIN_CALL 50.615 16.794 38.373 50.720 61.700

CALLNETPOS 0.035 0.008 0.029 0.034 0.040
Do pennies matter?

BUNDLE 0.318 0.466 0.000 0.000 1.000

FE 0.010 0.222 -0.010 0.010 0.040
MISS 0.264 0.441 0.000 0.000 1.000
LOSS 0.191 0.393 0.000 0.000 0.000
FLOSS 0.279 0.347 0.000 0.125 0.500
ROS -0.144 1.128 0.004 0.051 0.111
ABS_ROS_CH 0.309 1.293 0.010 0.031 0.109
MA 0.237 0.425 0.000 0.000 0.000
LNMVE 7.010 1.582 5.917 6.876 7.991
NUMEST 8.121 6.378 3.000 6.000 11.000
HIGHANAL 0.569 0.496 0.000 1.000 1.000
CAPITAL 0.128 0.334 0.000 0.000 0.000
PERCINT 0.568 0.305 0.374 0.635 0.811
INTAN 0.148 0.174 0.009 0.076 0.233
BTM 0.517 0.372 0.278 0.451 0.667
ABS_DEXC 0.008 0.027 0.000 0.000 0.003
LIT 0.353 0.478 0.000 0.000 1.000
CIG 0.067 0.249 0.000 0.000 0.000
RET 0.037 0.234 -0.086 0.027 0.151
VOL 0.027 0.014 0.017 0.024 0.033
231

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 Table 1 continued
232

Variablea Mean SD Q1 Median Q3

123
Q4 0.286 0.4518 0.000 0.000 1.000
AFTCLOSE 0.304 0.4600 0.000 0.000 1.000

This table provides descriptive statistics for the 20,511 firm-quarters in the sample
a
MIN_CALL is the number of minutes of entire conference call (assumes a word to minute ratio is 150:1). CALLNETPOS is the difference between the number of positive
and negative words during the entire conference call per the General Inquirer linguistic software, scaled by the total number of words in the entire conference call.
BUNDLE equals 1 if the firm issues any forward-looking guidance in the 3 days centered on the conference call and 0 otherwise. PQMIN_CALL equals MIN_CALL of the
conference call in the previous quarter. PQCALLNETPOS equals CALLNETPOS of the conference call in the previous quarter. PQBUNDLE equals BUNDLE of the
conference call in the previous quarter. FE equals actual earnings per share per I/B/E/S pre-split adjusted summary file minus the most recently calculated I/B/E/S pre-split
adjusted summary file before earnings announcement date. MISS equals 1 if FE \ 0 and 0 otherwise. LOSS equals 1 if actual earnings per share in I/B/E/S \ 0 and 0
otherwise. FLOSS is the percentage of quarters with negative earnings (Compustat #8) for firm i during the past eight quarters, requiring data for at least six quarters. ROS
is the return on sales for firm i during quarter t (Compustat #8/Compustat #2). ABS_ROS_CH is the absolute change in return on sales for firm i from quarter t - 4 to
quarter t. MA equals 1 if firm i engages in mergers or acquisitions between the end of the previous fiscal year and the end of quarter t, as reported on the Securities Data
Corporation (SDC) database and 0 otherwise. LNMVE equals the natural log of market value of equity at fiscal quarter end. NUMEST equals the number of I/B/E/S analyst
contributing to consensus earnings estimate. HIGHANAL equals 1 if numest[5 and 0 otherwise. CAPITAL takes a value of 1 if firm i raises new public capital during the
year after the earnings conference call for quarter t, as reported on the SDC database and 0 otherwise. PERCINT percentage of institutional holdings as of the most recent
calendar quarter before the current fiscal quarter end per 13(f) filing. Missing values are set to 0. INTAN equals firm i’s intangible assets as a percentage of total assets at
the end of the most recent fiscal year. BTM is the book-to-market ratio for firm i at the end of quarter t (Compustat #59/(Compustat # 14 9 Compustat #61)). ABS_DEXC
is the absolute difference between firm i’s non-GAAP EPS (actual EPS reported on I/B/E/S) for quarter t and its GAAP EPS (EPS before extraordinary items reported on
COMPUSTAT), deflated by stock price at the end of the quarter. LIT equals 1 if firm i is in an industry with a high litigation risk (SICs 2833–2836, 3570–3577, 7370–
7374, 3600–3674, 5200–5971, 8731–8734) and 0 otherwise. CIG equals 1 if firm issued guidance related to quarter t during the period from 2 days before to 30 days
before the earnings announcement. RET equals the value weighted market adjusted daily cumulative abnormal return calculated over the 90 trading days leading up to
trading day-2 relative to the conference call date. VOL equals the standard deviation of daily raw returns over the 90 trading days leading up to trading day-2 relative to the
conference call date. Q4 equals 1 if conference call is related to earnings of the fourth fiscal quarter and 0 otherwise. AFTCLOSE equals 1 if conference call held after
close of NYSE trading hours and 0 otherwise
R. Frankel et al.
Do pennies matter? 233

Table 2 Relation between earnings surprises and conference call characteristics

Independent variablea (A) MIN_CALL (B) CALLNETPOS (C) BUNDLE

b b
Coefficient t-stat Coefficient t-stat Coefficient t-statb

Intercept 7.913*** (6.66) 0.0148*** (16.19) -4.088*** (-11.74)

missge3 1.399*** (5.08) -0.0026*** (-17.44) -0.338*** (-4.64)
miss2 0.072 (0.15) -0.0020*** (-8.94) 0.060 (0.50)
miss1 0.891** (2.45) -0.0014*** (-6.87) -0.076 (-0.82)
miss0 -0.248 (-0.96) -0.0011*** (-8.18) 0.065 (0.98)
make1 -0.016 (-0.06) -0.0004*** (-2.98) -0.026 (-0.41)
make2 -0.803*** (-2.86) -0.0002 (-1.45) 0.040 (0.59)
LOSS -1.051*** (-3.53) -0.0003* (-1.75) -0.201** (-2.35)
FLOSS 1.045** (2.73) 0.0011*** (5.24) -0.293*** (-2.91)
ROS 0.168 (1.26) -0.0002** (-2.35) 0.091 (1.55)
VOL 31.227*** (3.47) 0.0006 (0.13) 6.110** (2.58)
RET -1.295*** (-3.73) 0.0012*** (6.21) 0.041 (0.45)
ABS_ROS_CH -0.059 (-0.55) 0.0000 (0.14) 0.000 (0.00)
MA 0.785*** (3.84) 0.0003** (2.52) 0.109** (2.23)
LNMVE 1.524*** (15.29) 0.0000 (-0.36) 0.090*** (4.03)
HIGHANAL 3.304*** (13.27) -0.0002 (-1.28) -0.177*** (-3.02)
CAPITAL 0.048 (0.18) 0.0000 (-0.37) 0.092 (1.35)
PERCINT 1.540*** (4.89) -0.0008*** (-4.85) 2.933*** (31.46)
INTAN 0.634 (1.07) 0.0016*** (5.19) 0.044 (0.30)
BTM -0.973*** (-3.37) -0.0007*** (-4.84) 0.028 (0.35)
ABS_DEXC 15.678*** (4.38) -0.0072*** (-3.88) 0.755 (0.74)
LIT -0.192 (-0.32) 0.0002 (0.57) 0.022 (0.15)
CIG -0.423 (-1.15) -0.0007*** (-3.56) 0.537*** (5.96)
AFTCLOSE -0.335 (-1.39) 0.0001 (0.68) -0.089 (-1.49)
BUNDLE 0.394* (1.89) 0.0001 (1.13)
Q4 2.822*** (13.66) 0.0006*** (6.02) -0.109** (-2.13)
PQMIN_CALL 0.573*** (60.82)
PQCALLNETPOS 0.5928*** (72.48)
PQBUNDLE 2.996*** (46.22)
Industry fixed effects Yes Yes Yes
N 20,511 20,511 20,511
Adjusted or Pseudo R2 0.513 0.443 0.412
c c
Tests on coefficients F-statistic p value F-statistic p value F-statistic p valuec

Test 1: miss1–miss0 [ 0 8.62 0.00 1.54 0.11 1.95 0.08

Test 2: miss1–miss0 [ miss2–miss1 5.97 0.01 0.93 0.17 1.81 0.09

123
234 R. Frankel et al.

Table 2 continued
Tests on coefficients F-statistic p valuec F-statistic p valuec F-statistic p valuec

Test 3: miss1–miss0 [ miss0–make1 5.93 0.01 2.02 0.08 2.54 0.06

This table presents the coefficient estimates from the OLS or Logistic regression of conference call
characteristics (MIN_CALL, CALLNETPOS, and BUNDLE) on earnings surprises and control variables
a
missge3 equals 1 if FE B -.03, 0 otherwise. miss2 equals 1 if FE = -.02, 0 otherwise. miss1 equals 1
if FE = -.01, 0 otherwise. miss0 equals 1 if FE = 0, 0 otherwise. make1 equals 1 if FE = .01, 0
otherwise. make2 equals 1 if FE = .02, 0 otherwise. makege3 equals 1 if FE [ = .03, 0 otherwise. See
Table 1 for remaining variable definitions. Coefficients on industry dummies are not presented
b
Firm clustered t-statistics are reported in parentheses. *, **, and *** indicate statistical significance at
the 1%, the 5%, and the 10% confidence levels, respectively (two-tailed). Tests of the hypothesized
relation between earnings surprise coefficients are reported below the regression estimates with one-tailed
p values presented

supports the miss-by-a-penny effect hypothesized in H1, where the reduction in call
length around meeting expectations is asymmetrical and most pronounced between
miss1 and miss0.13
Although we find statistically significant results for Hypothesis 1, the economic
significance of our findings is small. To calibrate economic effects, we set all
continuous variables to their sample means and all dichotomous variables to zero.
The fitted value for firms that miss by a penny (firms that beat by at least 3 cents) is
25.2 (24.3). Thus relative to firms that beat by at least 3 cents, firms that miss by a
penny have conference calls that are 3.66% longer.

4.2 Relation between earnings surprises and the tone of conference calls

In Column B of Table 2, we report the estimation results for model (2) on the tone
of conference calls, measured by the use of positive versus negative words
(CALLNETPOS). We find significantly negative coefficients on miss0, miss1, miss2,
missge3 and make1. Moreover, the coefficients become increasingly more negative
as the forecast error becomes more negative. As in Column A for call length, we
compare the coefficients on earnings surprises to test whether a 1-cent miss has an
asymmetrically negative effect on the tone of the conference calls (Hypothesis 2).
We find that firms missing expectations by 1 cent use 0.03% more negative words in
their conference calls than firms just meeting the benchmarks (Test 1,
p value = 0.11). We also find that a move from a 1-cent miss to a 2-cent miss is
associated with a statistically similar increase in the use of negative words (Test 2,
p value = 0.17) and that a move from beating by 1 cent to a just meeting is
associated with a greater increase (Test 3, p value = 0.08). Therefore, although we
13
We report the empirical results based on the length and the tone of the entire conference call in the
paper. Matsumoto et al. (2006) suggest a substitute relation between information provided in the
management presentation versus the question and answer section. In untabulated analyses, we also
examine the length and tone of the presentation section and the question and answer (Q&A) section
separately. For call length, we find the miss-by-a-penny effect for the Q&A section only, suggesting the
managers do not preempt the demand of analysts for information and increase the information disclosed
during the presentation section. For call tone, the reported results for the entire call hold for both subsets
of the call.

123
Do pennies matter? 235

find that missing by a penny has a marginally significantly negative effect on

conference-call tone relative to meeting earnings, we fail to find that the effect is
more pronounced than the effect associated with a 1-cent move in adjacent
intervals.14

4.3 Relation between earnings surprises and the issuance of earnings guidance

We report the estimation results of model (3) in the final column of Table 2. We
observe a significantly negative coefficient on missge3. We also find that the
coefficient on miss1 is significantly smaller than the coefficient on miss0 (Test 1:
miss1–miss0 = -0.141, p value = 0.08). Thus, consistent with Graham et al.’s
(2005) survey results regarding the effect of negative earning surprises on the
probability that a firm will provide future earnings guidance, we find that firms
missing earnings expectations are less likely to issue earnings guidance around the
conference call. To examine whether the probability for guidance issuance
decreases significantly more between miss0 and miss1 than between miss1 and
miss2 or between make1 and miss0, we compare the coefficients on earnings
surprises in Tests 2 and 3. We find significant results for both tests. The decrease
when moving from miss0 to miss1 is more negative than the move from miss1 to
miss2 (Test 2: miss2–miss1 = 0.136, p value = 0.09) and more negative than the
move from make1 to miss0 (Test 3: miss0–make1 = 0.091, p value = 0.06). In fact,
the changes associated with moves from miss1 to miss2 and from make1 to miss0
are actually positive. Thus we find a miss-by-a-penny effect on earnings guidance
issuance around the conference call.
To provide economic intuition for the logit coefficients just discussed, we
calculate predicted probabilities of issuing guidance using the results from Table 2,
Column C.15 The predicted probability for the base case of beating by at least 3
cents is 34.3%. We find that the probability for firms with miss0 to issue guidance is
only 1.5% more than the base case at 35.8%, while the probability for firms with
miss1 is 1.7% less at 32.6%. Thus, the probability of issuing guidance drops by
about 3.2% (1.5% ? 1.7%) when moving from miss0 to miss1. This drop in
probability is greater than the change in probability for firms in the adjacent
intervals, consistent with asymmetric consequences of missing by a penny.
However, the economic significance is not particularly large.

4.4 Additional analysis—analyst following partitions

Graham et al. (2005) suggest that the miss-by-a-penny effect is most salient in
settings where there is significant analyst following. Using the sample median
number of analysts following the firm, we define a firm to have high analyst
following (HIGHANAL = 1) when at least 6 analysts follow the firm and define all
14
Management retains some flexibility in terms of which analysts they choose to speak with. If managers
choose to have dialogs with analysts who carry favorable views of the firm (Mayew 2008), it can reduce
the negativity in the tone of the dialog.
15
To calculate predicted probabilities, we set all continuous independent variables equal to the sample
means and all indicator variables equal to zero except for the forecast error bin of interest.

123
236 R. Frankel et al.

other firms as having low analyst following (HIGHANAL = 0). We then re-estimate
each of the three models by allowing each forecast error to vary based on whether
the firm has high or low analyst following. For example, we replace missge3 in each
model with missge3HA (missge3LA) to capture situations where a firm misses by at
least 3 cents and has high (low) low analyst following.
Column A of Table 3 presents the results from the refined version of model (1)
that allows coefficients on forecast errors to vary based on the level of analyst
following. For firms followed by at least six analysts, we find that the coefficient on
miss1HA is significantly positive. Moving from a just meeting to a 1-cent miss is
associated with an increase in call length of 1.2 minutes (Test1: miss1HA–
miss0HA = 1.2, p value = 0.01). This increase in call length is statistically larger
than changes in call length when moving from a 2-cent miss to a 1-cent miss (Test2:
miss1HA–miss0HA [ missHA–make1AH, p value = 0.00) or from just meeting to
beating by 1 cent (Test3: miss1HA–miss0HA [ miss0HA–make1HA, p value =
0.02). However, for firms followed by less than 6 analysts, the coefficient on
miss1LA is not significant; p values for Tests 1, 2 and 3 are 0.02, 0.19 and 0.09,
respectively.
With respect to call tone, the analysis presented in Column B of Table 3 is
consistent with the overall sample results. We do not find a miss-by-a-penny effect
for either the low or the high analyst subsamples. With respect to forecasting
propensity, Column C of Table 3 provides weak evidence of a miss-by-penny effect
in the subsample of firms with high analyst following (Tests 1 through 3 reject the
null at the p B .11 or better) and no evidence in the low analyst following
subsample (no test rejects the null at better than p B .23). Collectively, these results
suggest that the overall results documented in Table 2 are heavily concentrated
among firms with large analyst following, as the survey evidence suggests.

4.5 Additional analysis—stock returns and conference-call characteristics

To the extent that earnings surprises affect both market reactions to earnings
announcements and conference call characteristics, we examine the association
between market reactions and conference call characteristics under examination.
Market reactions to earnings announcements are defined as the buy and hold stock
returns during the 24 hours prior to one hour before the start time of the conference
call, using intraday trade and quote (TAQ) data. Untabulated results reveal that as
the market reaction gets worse, the conference call becomes longer, the tone is more
negative, and the firm is less likely to issue earnings forecast around the conference
call. This result suggests that call characteristics and earnings announcement returns
capture similar underlying concepts.
To investigate the role of conference calls in shaping investor expectations, we
examine the association between conference call characteristics and stock returns to
the conference call. We again utilize TAQ data to compute stock returns from the
beginning to the end of the conference call. Untabulated results reveal that
conference call returns are positively associated with call length, call tone, and the
issuance of earnings forecasts, suggesting that conference call characteristics have
economic content in that they are related to pricing effects occurring during the call.

123
 Table 3 Relation between earnings surprises and conference call characteristics conditional on the level of analyst coverage
Independent variablea (A) MIN_CALL (B) CALLNETPOS (C) BUNDLE
b b
Coefficient t-stat Coefficient t-stat Coefficient t-statb

Intercept 7.893*** (6.68) 0.0147*** (16.00) -4.147*** (-11.87)

Do pennies matter?

missge3LA 1.516*** (4.05) -0.0021*** (-10.53) -0.228** (-2.20)

miss2LA 0.762 (1.17) -0.0016*** (-4.88) 0.049 (0.27)
miss1LA 0.605 (1.18) -0.0011*** (-3.56) 0.015 (0.10)
miss0LA -0.539 (-1.40) -0.0010*** (-4.46) 0.140 (1.23)
make1LA -0.548 (-1.40) -0.0003 (-1.50) 0.161 (1.48)
make2LA -0.352 (-0.81) -0.0002 (-0.92) 0.072 (0.60)
missge3HA 1.230*** (3.18) -0.0031*** (-15.06) -0.432*** (-4.16)
miss2HA -0.657 (-1.02) -0.0024*** (-7.75) 0.079 (0.52)
miss1HA 1.141** (2.25) -0.0016*** (-6.29) -0.139 (-1.17)
miss0HA -0.077 (-0.22) -0.0012*** (-7.10) 0.017 (0.21)
make1HA 0.295 (0.88) -0.0005*** (-2.85) -0.130 (-1.64)
make2HA -1.074*** (-2.94) -0.0002 (-1.24) 0.013 (0.16)
LOSS -1.073*** (-3.60) -0.0003* (-1.90) -0.201** (-2.34)
FLOSS 1.057** (2.76) 0.0011*** (5.34) -0.293*** (-2.90)
ROS 0.167 (1.25) -0.0002** (-2.26) 0.093 (1.57)
VOL 31.432*** (3.50) 0.0010 (0.22) 6.192** (2.62)
RET -1.288*** (-3.71) 0.0012*** (6.16) 0.037 (0.40)
ABS_ROS_CH -0.062 (-0.59) 0.0000 (0.21) 0.002 (0.04)
MA 0.784*** (3.83) 0.0003** (2.49) 0.111** (2.26)
LNMVE 1.523*** (15.28) 0.0000 (-0.41) 0.090*** (4.02)
HIGHANAL 3.261*** (9.41) 0.0001 (0.70) -0.071 (-0.88)
CAPITAL 0.052 (0.19) 0.0000 (-0.34) 0.093 (1.36)
237

123
 Table 3 continued
238

Independent variablea (A) MIN_CALL (B) CALLNETPOS (C) BUNDLE

b b

123
Coefficient t-stat Coefficient t-stat Coefficient t-statb

PERCINT 1.539*** (4.88) -0.0008*** (-4.81) 2.936*** (31.48)

INTAN 0.617 (1.04) 0.0016*** (5.15) 0.046 (0.31)
BTM -0.971*** (-3.36) -0.0007*** (-4.81) 0.027 (0.34)
ABS_DEXC 15.685*** (4.37) -0.0071*** (-3.86) 0.756 (0.74)
LIT -0.227 (-0.38) 0.0002 (0.52) 0.021 (0.15)
CIG -0.415 (-1.13) -0.0007*** (-3.47) 0.539*** (5.97)
AFTCLOSE -0.338 (-1.41) 0.0001 (0.58) -0.093 (-1.54)
BUNDLE 0.395* (1.90) 0.0001 (1.08)
Q4 2.820*** (13.65) 0.0006*** (6.03) -0.109** (-2.12)
PQMIN_CALL 0.573*** (60.81)
PQCALLNETPOS 0.5924*** (72.57)
PQBUNDLE 2.998*** (46.24)
Industry fixed effects Yes Yes Yes
N 20,511 20,511 20,511
Adjusted or pseudo R2 0.514 0.443 0.412
c c
Tests on coefficients f-statistic p-value f-statistic p-value f-statistic p-valuec

High analyst following

Test 1: miss1HA–miss0HA [ 0 5.15 0.01 2.06 0.08 1.45 0.11
Test 2: miss1HA–miss0HA [ miss2HA–miss1HA 7.14 0.00 0.62 0.22 1.87 0.09
Test 3: miss1HA–miss0HA [ miss0HA-make1HA 4.47 0.02 0.79 0.19 2.82 0.05
Low analyst following
Test 1: miss1LA–miss0LA [ 0 4.26 0.02 4.82 0.01 0.58 0.23
R. Frankel et al.
 Table 3 continued
Tests on coefficients f-statistic p-valuec f-statistic p-valuec f-statistic p-valuec

Test 2: miss1LA–miss0LA [ miss2LA–miss1LA 0.78 0.19 0.45 0.25 0.25 0.30

Test 3: miss1LA–miss0LA [ miss0LA–make1LA 1.83 0.09 1.11 0.15 0.17 0.34
Do pennies matter?

This table presents the coefficient estimates from the OLS or Logistic regression of conference call characteristics (MIN_CALL, CALLNETPOS, and BUNDLE) on earnings
surprises and control variables
a
missge3LA equals 1 if FE B -.03 and HIGHANAL = 0, 0 otherwise. miss2LA equals 1 if FE = -.02 and HIGHANAL = 0, 0 otherwise. miss1LA equals 1 if FE =
-.01 and HIGHANAL = 0, 0 otherwise. miss0LA equals 1 if FE = 0 and HIGHANAL = 0, 0 otherwise. make1LA equals 1 if FE = .01 and HIGHANAL = 0, 0 otherwise.
make2LA equals 1 if FE = .02 and HIGHANAL = 0, 0 otherwise. makege3LA equals 1 if FE C .03 and HIGHANAL = 0, 0 otherwise. missge3HA equals 1 if FE B -.03
and HIGHANAL = 1, 0 otherwise. miss2HA equals 1 if FE = -.02 and HIGHANAL = 1, 0 otherwise. miss1HA equals 1 if FE = -.01 and HIGHANAL = 1, 0 otherwise.
miss0HA equals 1 if FE = 0 and HIGHANAL = 1, 0 otherwise. make1HA equals 1 if FE = .01 and HIGHANAL = 1, 0 otherwise. make2HA equals 1 if FE = .02 and
HIGHANAL = 1, 0 otherwise. makege3HA equals 1 if FE C .03 and HIGHANAL = 1, 0 otherwise. See Table 1 for remaining variable definitions. Coefficients on
industry dummies are not presented
b
Firm clustered t-statistics are reported in parentheses. *, **, and *** indicate statistical significance at the 1%, the 5%, and the 10% confidence levels, respectively (two-
tailed). Tests of the hypothesized relation between earnings surprise coefficients are reported below the regression estimates with one-tailed p values presented
239

123
240 R. Frankel et al.

5 Conclusion

We study conference call characteristics to provide evidence on whether missing

analyst expectations by a small amount is associated with asymmetrical investor-
relations effects. We find some statistical evidence for these effects with respect to
conference call length and issuance of earnings guidance around the call. Call length
significantly increases in quarters when firms miss analyst expectations by a penny.
This increase is more pronounced compared with changes in adjacent forecast error
intervals. For example, the reduction in call length between firm quarters that miss
expectations by a penny and those that meet expectations is significantly larger than
the reduction in call length between firm quarters that meet expectations and those
that exceed expectations by a penny. Similarly we find a more marked decline in the
propensity of firms to issue future earnings guidance when comparing firm quarters
that just miss expectations with those that meet expectations.
However, we cannot find similar asymmetric effects on call tone. While
conference calls following the announcement of earnings that miss expectations are
more negative in tone than calls following earnings announcements that meet or
exceed expectations, we do not find a pronounced change in call tone between
quarters that just miss expectations and those that meet expectations compared with
changes in adjacent intervals.
Overall, our results provide some statistical support for CFO claims of the
existence of disproportionate and negative investor-relations effects associated with
missing consensus analyst expectations by a small amount. However, our tests
challenge the economic significance of these claims. For example, we estimate that
call length increases by about 3% and that the propensity to issue guidance declines
by 3% when a firm misses the expectation by one penny. Depending on the
asymmetries in their loss functions and their risk aversion, CFOs may view these
effects as severe. An alternative reason for the apparently wide-spread belief that
missing analyst expectations by a mere penny has disproportionately negative
effects on the firm is that observers attach too much weight to a few outstanding
examples.

Acknowledgements We gratefully acknowledge the comments of Doron Nissim (editor), two

anonymous referees, Shane Dikolli, Yonca Ertimur, John Hand, Nicole Thorne Jenkins, Ben Lansford,
Ron King, Raj Mashruwala, Jenny Tucker, Tzachi Zach, seminar participants at Washington University in
St. Louis, the 2007 Southeast Summer Accounting Research Conference, and the 2007 American
Accounting Association Annual Meeting.

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