World Monitor Mag WM_June 2018 web - Page 98

additional content Detecting lies on earnings calls Jan Alexander is a New York–based editor and writer. Her work has appeared in Institutional Investor and Worth. Around the world, trust in large institutions and their leaders is at a distinct ebb. The 2017 Edelman Trust Barometer, which measures trust in government, business, and other institutions, found that trust in CEOs fell to a record low 37 percent in 2017, down from 49 percent in 2016. Of course, post-truth era or not, business executives don’t generally go around spouting unverifiable facts and numbers. That’s in part because they face stiff penalties for doing so. If a CEO says earnings per share were $1.50 last quarter when, in fact, the company reported earnings per share of 64 cents, investors will quickly punish the company and its stock. It’s pretty easy to measure whether a CEO is being truthful about results. But there is a lot more nuance involved when it comes to measuring credibility, which is earned by speaking without obfuscation and meaning what you say. And that’s precisely what Joel Litman, chief executive officer of Valens Research in Cambridge, Mass. — a financial research firm that offers forensic and uniform accounting analysis to clients — has in mind as he prepares his lie detector equipment for the coming round of year-end earnings reports. Hedge fund managers and other large investors hire forensic analysts to sit in on corporate earnings calls. The first half of such 94 world monitor calls tend to be heavily scripted, as top leaders run through the results. But in the second half, executives answer questions from equity analysts — or evade those questions — and therefore are working without a script. That’s when the Valens analyst keeps an eye glued to the firm’s proprietary electro-audiogram (EAG) system, which measures voice patterns. Think of the digital audiogram as a sophisticated lie detector test. In all, it maps a total of 15 markers that gauge whether the speaker seems to believe his or her own words based mostly on inflection — whether the voice seems stressed or hesitant, grows louder or softer, speeds up or slows down. The effectiveness of the EAG depends on the psychological principle of cognitive dissonance — the physical discomfort that arises in most people when they try to hold two opposing ideas in their brain at the same time. If the audiogram indicates a high level of speaker confidence, Valens reports to its clients that the leaders of Company X seem to have a firm grasp on their plans for future growth or for confronting challenges. That might give investors a good reason to buy Company X stock. By the same token, a low confidence score might be a clue that investors should stay out of the stock or short-sell it. Valens and others in the business of detecting cognitive dissonance,