Signalling through managerial tone and analysts’ response

This study investigates the interaction between a tone signaller and receiver through managerial tone on a conference call. Based on a signalling framework, we examine the following research questions: Does the signal (tone) match the latent information it intends to convey? Can a receiver (analyst) interpret the signal correctly and send feedback to confirm (or disconfirm) it? Does the signalling environment impact signalling effectiveness? Using a sample of 3,680 transcripts of earnings conference calls from 241 UK firms in the FTSE 350 Index, we find that managerial tone can produce effective signals that match private information from managers. Analysts understand tone signals accurately and send confirmation feedback to managers. They revise their forecasts upward (downward) following more (less) optimistic managerial tones. They consistently confirm and respond to managers with a similar tone. Analysts with superior expertise, experience and ability better understand the tone signal, leading to a larger reduction in forecast error. The information environment can moderate signalling effectiveness. This shows that managerial tone represents a reliable signalling device for transmitting latent information on a firm’s quality and future performance and that receivers can understand this signal correctly. This study highlights the signalling role of managerial tone in managers and analysts’ communication.