RESEARCH PURPOSE

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Conference calls typically begin with prepared statements by management, which usually reiterate the press release, and are then opened up to questions from analysts. The dialogue between management and analysts relative to firm performance is a potentially rich information source.

From the company's perspective, conference calls save time and mitigate selective disclosure problems, because management can talk to hundreds of analysts and money managers simultaneously, and the investor relations staff receives fewer calls. From the analyst's perspective, the benefits of conference calls include the opportunity to hear the questions of others (55%); the saving of time and money vis-a-vis traveling to meetings (45%); the receipt of timely information (13%); and the receipt of information at the same time as other investors (9%). ¹ Frankel, Johnson, & Skinner (1999) state that conference calls provide benefits to the company and its analysts.

Conference calls are often used to supplement mandated disclosures, in particular, quarterly earnings releases. It seems likely that conference calls will be used when such supplementation is most beneficial; for example, in helping analysts ascertain the extent to which earnings changes are permanent or transitory.

Although Conference calls are deem as voluntary disclosure, there are also laws to regulate conference calls. As the law of Corporate Governance Best Practice Principles for Taiwan Stock Exchange Corporation ("TWSE") and the Gre Tai Securities Market ("GTSM”) listed Companies goes, the article 58 states way of holding institutional investor meeting: A TWSE/GTSM listed company shall hold an investor conference in compliance with the regulations of the TWSE and GTSM, and shall keep an audio or video record of

1 Percentages taken from a survey of 122 analysts and portfolio managers by Christensen and Associates [1992].

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the meeting. The financial and business information disclosed in the investor conference shall be disclosed on the designated Internet information posting system and provided for inquiry through the website established by the company, or through other channels, in accordance with the TWSE or GTSM rules. Also the law of Taiwan Stock Exchange Corporation Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities goes, the article 8 states : Listed company holding conference calls should comply with the following matters: A TWSE listed company shall be invited to hold or hold a conference call at least one time every three year in Taiwan.

Primary listed companies shall be invited to hold or hold a conference call at least one time every year in Taiwan. We can see government and capital market pay more attention to the conference calls.

Recent literature argues that earnings conference calls have become an increasingly important medium through which firms convey value relevant information to the market.

Because there is information asymmetry between corporate management and investors so recent literature argues that earnings conference calls have become an increasingly important medium through which firms convey value relevant information to the market.

Frankel et al. (1999) studied the role of conference calls as a medium of voluntary disclosure and found that companies that used this tool more frequently tended to be larger, more profitable, faster growing and more interactive with the market. They empirically examine conference calls as a voluntary disclosure medium by analyzing stock volatility and trading volume levels at the time of the conference calls. They find that return variances and trading volume are both elevated during conference calls, suggesting that conference calls provide information to the market beyond that which is found in the press release alone. In other words, the calls contain material information and investors’ trade on this information in real time.

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Kimbrough (2005) contends that conference calls are a voluntary disclosure mechanism of increasing importance that provide corporate managers with a forum in which they can emphasize specific aspects of recent performance and highlight their implications for future financial performance. Following opening remarks by management, analysts are allowed to make comments and pose questions. Kimbrough notes that during this somewhat informal exchange, details not contained in the earnings press release are often disclosed.

The disclosures during conference calls help mitigate potential information asymmetry between managers and investors. During the presentation portion of the call, managers provide their interpretation of the firm’s performance during the quarter and provide any additional, voluntary disclosures they wish to communicate. In addition to possibly providing new disclosures during the presentation, managers also provide the information verbally, which is potentially informative to the market because of the information content of verbal cues Mayew & Venkatachalam (2012).

There are at least two reasons that conference calls might be incrementally informative over a press release. First, managers are able to provide information in a less constrained fashion relative to financial statements and written press releases. Second, analysts can play a direct role in uncovering information during the question-and-answer session asking follow-up questions, requesting more detail, and perhaps questioning management’s interpretation of events. If the ability to disclose information in a less constrained fashion results in greater disclosure, then they expect the presentation portion of the call to be incrementally informative over the accompanying press release (Matsumoto, Pronk, & Roelofsen, 2011). Recent proposed changes by the Public Company Accounting Oversight Board (PCAOB) suggest that these calls can also be informative for assessing auditing risk (PCAOB Release 2009-007).

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Because conference calls can mitigate potential information asymmetry, investors can get more information to make decision in the stock market, and conference calls will have an impact on stock market. Brown, Hillegeist, & Lo (2004) argued that the information provided in conference calls influenced analysts, enabling them to better assess their outlook on companies performance. Their results showed that analysts’ involvement in conference calls improved their forecasting ability, thus suggesting the use of this form of communication increased the quantity and quality of the information available on the company. Their study also pointed out, that conference calls could generate an information gap between different classes of investors and analysts with worst estimates in the past benefited most by participating in conference calls sessions. Moreover, they found that conference calls decreased dispersion among analysts, and consequently reduced the level of information asymmetry.

Recent empirical studies such as Henry (2007), Davis et al.(2007), Li (2008), Tetlock (2007), and Tetlock et al. (2008), Sadique (2008) indicate that language used in firms’

earnings disclosures or in news media reports significantly affects stock returns. They extract the tone of the wording of quarterly earnings press releases and relate it to things such as stock returns, volatility, and firm performance. All of these textual analysis studies find statistical significance for the linguistic tone of disclosure documents, suggesting that relevant information is conveyed by managers in their word choices.

Formal reports such as balance sheet, income statement, statement of cash flows have its official format to comply with, so managers face more constraints when communicating with investors through formal reports and announcements (e.g. annual reports, earnings announcements, etc.) and, consequently, suggests that conference calls may provide a better setting in which to explore the relation between linguistic content and firm performance. In other words, quarterly earnings conference calls provide a forum in

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which to more fully examine corporate disclosure as executives interact with call participants through the unscripted question and answer sessions. In the context of earnings announcements, the new financial information usually studied is the amount of unexpected earnings announced (Li, 2008).

The language used in earnings press release and conference calls will affect information receiver’s sentiments then affect their decisions in stock market. Using 24,000 quarterly firm issued earnings press releases from PR Newswire between 1983 and 2003, Davis et al. (2007) find contemporaneous relationship between returns and optimistic and pessimistic language usage in earnings press releases after controlling for other factors known to influence the market response to earnings announcements. Investors are also found to be affected by the use of language in media reports.

Content analysis enables quantification of text based information. A recent stream of literature utilizing tools relatively new to finance, but well established in a wide variety of other disciplines, allows a better understanding of the information content of words. There are literatures employs psychosocial dictionaries to count words that reflect particular characteristics of the text such as General Inquirer (GI) or Linguistic Inquiry and Word Count (LIWC).

Engelberg (2008) applies the method outlined in Tetlock (2007) to measure the qualitative content of Dow Jones News Service stories about firms ’ earnings announcements to analyze the link between “ soft ” information and equity prices. He finds support for Tetlock (2007) and demonstrates a relation between linguistic media content and the stock market. Companies that announce earnings will have an impact on stock price, Ball and Brown (1968) find evidence that stock prices continue to drift upward (downward) after initial positive (negative) earnings announcements, rendering the initial

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stock price reaction to the earnings news incomplete and raising questions of market efficiency. Tetlock, Saar-Tsechansky, & Macskassy (2008) examine whether language used in news reports about a firm’s earnings predicts its earnings and returns for S&P 500 firms over the sample period of 1984 to 2004. They find that negative words in firm-specific news stories predict low firm earnings, that stock prices under react to negative words used in news stories and that the impact of negative words on earnings and returns is highest for stories about firm fundamentals.

Investors that have seldom opportunity to fully understand the operating conditions usually read the financial news to know the conditions of stock market, and their opinions are often influenced by news. Mullainathan & Shleifer (2005) document that the origin of media spin bias (or demand-side bias) derives from the literature on bubbles and panics, which shows that people read and believe only those reports that satisfy their preconceived notions. Consequently, media shape news to be attractive to readers by highlighting content that reinforces their preconceived notions. Henry (2007) examines whether the writing style, including tone, of earnings press releases influence investors. Henry shows that (a) stylistic attributes of earnings press releases in addition to actual financial performance affect market reaction to earnings announcements and (b) earnings surprise has less impact on abnormal returns, but this depends on press releases’ length, numerical intensity, and textual complexity.

Past research that do content analysis usually use computer-based content analysis techniques; in addition to use computer-based content analysis techniques which use this research’ specified dictionary (shown in Appendix 4 and 5 ) to count the words, this study establishes the rules to read the news and give scores based on manual reading.

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The specified dictionary is established by three graduate students including me, and are triple checked by three graduate students major in Accounting and our instructor professor Seng who expertizes in Data mining and Information and Technology. First, we select the financial news which are categorized as Economics and Trade, Finance, Industry, Technology and Financial Investment in Knowledge Management Winner (KMW) news database. Second, we select the positive words and negative words line by line such as good, bad, excellent etc. Third, the positive words and the negative words are triple checked by three graduate students and our instructor professor Seng to make sure the words we select are appropriate. Finally, the dictionary are finished.

Appendix 2 shows that the rules to score the conference calls’ news and appendix 3 shows that the outcome of word counts and scores.

This research focus on the how the financial news report conference calls and use our data analytics techniques to extract information from our data and analyze its relationship between stock market volatility and conference calls. Our measures of content are based on two methods, one is word counts of financially of each conference calls news, and the other is the rules to score the conference calls’ news. This research develop a customized word list of financially oriented words based on an analysis of commonly used words in conference calls. The other process of dealing with news follow the rules of scoring conference calls’ news and the news are from Knowledge Management Winner (KMW) news database. After counting and scoring the news, this research conduct a regression analysis to provide evidence that the financial news content have an impact on stock price volatility. The results show that conference calls’ content conveys information to market participants and affect stock price volatility. In addition, SCORE has significant explanatory power for stock price volatility, as measured by the five day event window (days zero through day four), after controlling the variables that would affect stock price

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volatility. However, the TONE measured on a customized, domain relevant dictionary does not have significance for stock price volatility by the five day event window (days zero through day four).

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