Playing Favorites: How Firms Prevent the Revelation of Bad News

Given the current regulatory environment in the United States (and increasingly globally) of level playing-field information laws, firms can only communicate information in public exchanges. However, even in these highly regulated venues, there are subtle choices that firms make that reveal differential amounts of information to the market. In this paper the authors explore a subtle but economically important way in which firms shape their information environments, namely through their specific organization and choreographing of earnings conference calls. The analysis rests on a simple premise: firms understand they have an information advantage and the ability to be strategic in its release. The key finding is that firms that manipulate their conference calls by calling on those analysts with the most optimistic views on the firm appear to be hiding bad news, which ultimately leaks out in the future. Specifically, the authors show that "casting" firms experience higher contemporaneous returns on the (manipulated) call in question, but negative returns in the future. These negative future returns are concentrated around future calls where they stop this casting behavior, and hence allow negative information to be revealed to the market. Key concepts include:

• The paper shows new evidence on a channel through which firms influence information disclosure even in level-playing-field information environments.
• The pattern of firms appearing to choreograph information exchanges directly prior to the revelation of negative news is systematic across the universe of firms.