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,