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E-MailGwen Yu is associate professor of business administration at Harvard Business School. This post is based on a recent paper authored by Professor Yu; Francois Brochet, Associate Professor of Accounting at Boston University Questrom School of Business; Gregory S. Miller, Ernst and Young Professor of Accounting at University of Michigan Ross School of Business; and Patricia Naranjo, Assistant Professor of Accounting at Jones Graduate School of Business at Rice University.
To what extent does the cultural background of managers impact how they communicate with investors? In our study, Managers Cultural Background and Disclosure Attributes, we build on prior research to deepen our understanding of the economic significance of individuals’ cultural background in a corporate context. More specifically, we focus on managers’ communication style during earnings conference calls. We examine how the cultural backgrounds of individual managers—based on their ethnic heritage—affect their disclosure narrative.
The psychology literature has long studied how culture influences individuals (Guiso et al. 2006; Alesina and Giuliano 2015), and has identified one of the most important factors in explaining people’s behavior: whether a person belongs to an individualistic vs. collectivist culture. This divide is based on the extent to which members of a society derive greater satisfaction from an independent self-construct (generally associated with Western cultures), as opposed to being strongly integrated into a cohesive group (generally associated with Eastern cultures). The individualism score developed by Hofstede (2001) has been shown to correlate with several behavioral patterns such as overconfidence (Chui et al 2010), optimism (Heine et al. 1999), and self-esteem (Kagitcibasi 1997; Okimoto et al. 2013).
To analyze the effect of cultural individualism on corporate managers’ discourse, we first had to isolate a setting where managers’ personalities and cultural background would more likely come through unfiltered. We found such a setting in Q&A sessions at the end of conference calls, where the interactions between the managers and market participants tended to be more impromptu.
We measured three disclosure attributes in the Q&A portions of the conference call transcripts: (i) tone, (ii) self-reference and (iii) apologies. Disclosure tone is determined by the prevalence of positive or optimistic words, relative to negative or pessimistic words. Self-reference is how often the speaker said “I” or its equivalents. And apologies were determined by counting associated words, such as “sorry” or “apologize”.
We then identified the ethnic group of executives based on their last names, using an ethnicity-name matching algorithm developed by Kerr (2008), using a large database of individual names for targeted mail marketing. The technique assigns each person’s name to one of nine ethnic groups: Anglo-Saxon, Chinese, European, Hispanic, Indian, Japanese, Korean, Russian/Slavic, and Vietnamese.
Using a sample of earnings calls transcripts with 26,430 executives from 42 countries, we found that managers from individualistic cultures were more likely to use positive tone, more likely to use the word “I” and make fewer apologies. The results were robust; they held, even when we controlled for the context of the news (e.g., positive versus negative earnings results), country-level factors such as disclosure quality in different capital markets, and other individual characteristics such as age and gender. Our findings also continue to hold when we limit our sample to executives from companies based in the US, giving reassurance that differences in country-level institutions alone could not explain our results.
An open question was also whether individuals exposed to a different culture would still express themselves in a manner that is still reflective of their ethnic roots. Looking at executives who were not native to their disclosing locations (i.e., the headquarter of their firm), we found that the cultural traits are long lived. When managers move to a new country with a different individualism score, they will assimilate (i.e. similar to becoming Americanized in the U.S.) to some extent, but the impact of the inherited culture still remained significant.
In addition, since companies typically are not run by an individual but a team of managers, we also wanted to look at how diversity in management might affect a firm’s disclosure style. We found that the more diverse the management group, the less consistent message they sent during a call. As our society promotes greater diversity in managerial upper echelons, it is important to also observe and anticipate the impact of creating a more diverse workplace and what it means when it comes to sending a coherent signal to investors.
How did the market react to the differences in style? It reacted to the styles in a predictable manner: Optimistic tone was associated with positive cumulative abnormal intra-day stock returns during the conference calls. However, we found no evidence that the market differentiated the disclosure tone of managers from different ethnic backgrounds. That is, positive tone lead to similar stock returns regardless of the management team’s ethnic makeup, despite the fact that we had shown that tone was influenced by that ethnic makeup. Both of these findings suggest that capital market participants do not adjust for managerial cultural background when processing the implications of tone for firm value.
The full paper is available for download here.
