Do CEOs lie? Perhaps, but not how you think
When publicly traded companies report their quarterly results, executives typically talk with investors on a conference call to update them on the current-quarter and expected business trends. But it turns out that many of those executives may not be telling the truth.
Corporate execs tend to downplay their current results and provide more pessimistic forecasts and negative tones even when their companies are experiencing strong sales, according to researchers Kenneth Froot, Namho Kang, Gideon Ozik and Ronnie Sadka, who published their findings with the National Bureau of Economic Research.
The researchers wanted to find out whether managers disclose information on a timely basis or whether they "lean against the wind," which in this case means downplaying good news. They found that managers favor downplaying, which may be no surprise given that many leaders believe it's better to exceed low expectations rather than stumble when trying to meet higher ones.
Yet the reason for executives acting this way may have a deeply personal reason: self-enrichment, the researchers noted.
"Our central interpretation is that managers intentionally understate their expectations about the next quarter to increase the predictability of stock prices post announcement for their personal advantage," the researchers noted.
They added, "This last fact -- that objective measures of guidance and tone are negatively correlated with postquarter private information -- is important. One could otherwise argue that managers cannot control how investors and analysts hear their announcement guidance and voluntary disclosures."
The researchers, who are from Harvard's Graduate School of Business, University of Connecticut, EDHEC-Risk Institute and Boston College's Carroll School of Management, tapped data from more than 350 million consumer devices to create a sales indicator for 50 retailers, ranging from American Eagle Outfitters (AEO) to Williams-Sonoma (WSM). They found that the data correlated well with the revenue growth reported by the businesses.
Yet even when the data indicated that sales in the post-quarter period were strong, executives tended to point investors in the other direction. "This effect is more pronounced when, post-announcement, management insiders trade," the researchers wrote. "We conclude managers do not fully disclose their private information and instead message to shareholders and analysts something of opposite sign. The data suggest they may be motivated in part by subsequent personal stock-trading opportunities."
That may be a cynical interpretation, but the history of Corporate America is littered with cases of executives who lied in order to line their own pockets. Of course, many of the cases also involve executives promoting their stocks or exaggerating their company's results.
Take the case of Computer Associates, the corporate software company. Over a decade ago, its top executives were involved in a contract backdating scandal, which was designed to pump up its stock price. One reason? CA's top executives were in line for $670 million in bonuses if the shares remained above a certain price.
The case of downplaying results sheds light on human nature: When it comes to personal gain, some will find a way to work the system.