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The Journal of Real Estate Finance and Economics

Erschienen in:

01.08.2012

Earnings Conference Call Content and Stock Price: The Case of REITs

verfasst von: James S. Doran, David R. Peterson, S. McKay Price

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 2/2012

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Abstract

Using computer based content analysis, we quantify the linguistic tone of quarterly earnings conference calls for publicly traded Real Estate Investment Trusts (REITs). After controlling for the earnings announcement, we examine the relation between conference call tone and the contemporaneous stock price reaction. We find that the tone of the conference call dialogue has significant explanatory power for the abnormal returns at and immediately following quarterly earnings announcements. The question and answer portion of the conference calls dominates prepared managerial introductory remarks in explanatory significance. Furthermore, an overall positive tone in the conference call discussion between management and analysts is found to nearly offset the damaging effects of a negative earnings surprise.

Vorheriger Artikel Market Value of REIT Liquidity

Nächster Artikel Dividend Size, Yield, Clienteles and REITs

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REITs are required to hold individual properties for at least 4 years and can sell up to 10% of their asset bases in a given year. The intent of the rule is to keep REITs from buying property primarily for resale. Muhlhofer (2008) demonstrates that REITs would buy and sell assets more frequently if they were not subject to the holding period requirement. Still, there are no restrictions on the number of properties they can acquire in a given year. With new acquisitions and the potential to sell up to 10% of their portfolios, REITs are able to substantially alter their asset bases each year.

By definition this includes all publicly traded REITs.

Regulation Fair Disclosure, effective October 23, 2000, opened up conference calls to the public. The final SEC rule, widely known as “Regulation FD”, is available at http//www.sec.gov/rules/final/33-7881.htm.

See Bernard (1992) for a thorough review of possible explanations for the anomalous evidence for stock price reactions to earnings announcements.

This is also noted in Frankel et al. (1999).

Sunder (2002) and Irani (2004) find that this holds both before and after passage of Regulation Fair Disclosure.

This is also noted in Fama (1998).

Content analysis techniques, developed over 40 years ago, were originally applied in journalism, psychology, communications, and other social sciences.

See Krippendorf (2004) for a complete history of content analysis, including its development and application across disciplines.

Internal Revenue Code Sect. 857(a)(1).

A growing body of empirical research documents REIT transparency (Hardin et al. 2005; Devos et al. 2007; Hardin and Hill 2008; Blau et al. 2009; Dolvin and Pyles 2009). See Blau et al. (2009) for a review of this work.

http://www.reit.com/InstitutionalInvestors/Dividends/tabid/101/Default.aspx

Because the NAREIT index tracks all publicly traded tax qualified REITs, there is no index inclusion effect such as is seen when firms are included in, for example, the S&P 500 Index, which could to lead to increased exposure with higher levels of analyst coverage.

http://www.djindexes.com/

Differences between the FTSE NAREIT All REITs Index and the Dow Jones REIT Composite Index are minimal. The NAREIT index is set to 100 as of December 31, 1971, while DJRC index pegs the index at 100 on the base date of December 31, 1991. Additionally, the exact date a firm is added to, or removed from, index calculation may vary slightly between the two. On a monthly basis, returns between the NAREIT and DJRC indices have a correlation coefficient of 0.9988 during the sample period.

See Tetlock et al. (2008) for a fairly detailed listing of work involving the application of content analysis in finance.

See the Appendix for further detail on content analysis, a description of the categories, and word lists.

Loughran and McDonald (2009) create a customized word list dealing with financial terms as well. However, we use the Henry (2008) word list because we are dealing specifically with earnings and earnings announcement related terminology, consistent with Davis et al. (2007), Henry (2008), Sadique et al. (2008).

We run our analysis using an analyst EPS forecast based surprise measure as well. While results are unchanged, incorporating analyst forecasts causes substantial sample attrition which can potentially lead to a large firm bias. Furthermore, Ljungqvist et al. (2009) show analyst data sources to be unreliable and Graham et al. (2005) find that 85.1% of CFO’s consider earnings in the same quarter of the prior year to be the most important earnings benchmark. Accordingly, analyst forecast based measure results are untabulated.

Although Downs and Guner (2006) find that analyst REIT FFO forecast quality is higher than for EPS, Baik et al. (2008) show that the usefulness of FFO is dependent on its reconciliation to GAAP EPS.

Although not shown, the descriptive statistics for the various tone measures broken down by quarter show little variation through time.

Again, results are identical for both H-TONE₁ and H-TONE₂ based abnormal return portfolios.

Feldman et al. (2009) advocate using the change-in-tone from the most recent past rather than tone levels. They argue that change-in-tone helps mitigate potential problems associated with recurring word usage which may be unique to a particular industry or firm. Additionally, the unexpected component of tone may convey the most relevant information to investors. Davis et al. (2007) and Engelberg (2008) use change-in-tone in addition to tone levels as alternative tone measures and find their results remain qualitatively unchanged. Following Davis et al. (2007), we take the difference in conference call tone in the current and immediately preceding quarter as an alternative specification. Although not shown, we find similar results when the tone measures are calculated as the change-in-tone from the preceding quarter.

While we find statistical significance, the proportion of unexplained variation in abnormal returns remains large as seen with the low R-squared measure. However, this is entirely consistent with the literature which generally finds low R-squared measures when working with CARs.

Recalling the relation between earnings announcement and conference call dates displayed in Table 1, the two-day conference call period includes or immediately follows the earnings announcement date. Thus, the nine-day significantly negative coefficients on earnings surprise suggest correction to initial overreaction.

The abnormal return pattern in Fig. 1 reflects the combined influences of the conference call and the earnings release.

Sorts based on H-TONE₁ and H-TONE₂, in addition to sorts using medians, are untabulated since the results are qualitatively the same as those presented. Furthermore, results for H-TONE₁ and H-TONE₂ are identical to one another since the sort breakpoints are the same for the two tone constructs.

Across both tables, 12 out of 12 two-day CARs in the low earnings surprise tercile are negative, indicating that these earnings releases tend to be negative surprises.

Regression results are consistent across all tone measures and choice of benchmark model used to estimate abnormal returns. For brevity, results using the TONE₁ and H-TONE₁ tone measures, as well as the benchmark model that incorporates both the Dow Jones REIT Composite Index returns and the CRSP Value Weighted returns as explanatory variables in abnormal returns estimation, are not tabulated. Additionally, untabulated descriptive statistics show that the tone of the introductory portion of the calls is slightly more positive than discussion portion in every quarter of the sample, with little difference in both relative and absolute magnitudes of the different tone measures over time.

We thank an anonymous referee for suggesting this addition. The additional variables are selected following related work by Davis et al. (2007), Tetlock (2007), Tetlock et al. (2008), Engelberg (2008), and Frankel et al. (2010), which control for both the disclosure of additional information and other factors that are known to affect returns.

The literature shows that REIT stocks and industrial equities behave in a similar manner in some cases and differently in others. For example, when analyzing REIT IPOs, Hartzell et al. (2005) and Buttimer et al. (2005) find that, in contrast to typical equities, REITs do not experience short term underpricing and long run underperformance. However, other studies find that REITs tend to behave like other stocks following structural changes to the industry in the early 1990s. Chan et al. (2005) find that REITs exhibit the weekend effect similar to typical stocks. In a similar fashion, Redman et al. (1997) show that the January effect is present in REIT returns like other equities.

Furthermore, in untabulated results we find that our inferences remain unchanged when the tone measures are calculated as the change in tone from the previous quarter.

We thank an anonymous referee for suggesting this robustness check.

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Titel: Earnings Conference Call Content and Stock Price: The Case of REITs
verfasst von: James S. Doran
David R. Peterson
S. McKay Price
Publikationsdatum: 01.08.2012
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 2/2012
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-010-9266-z

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