Making investors feel good during earnings conference calls: The effect of warm-glow rhetoric

In recent years, earnings conference calls have become a popular disclosure tool through which top managers can provide more information to the market regarding the quarterly earnings of their firms. Although some research has indicated that the tone of earnings conference calls is crucial in mitigating investors’ negative reactions to earnings surprises, relatively little is still known about other rhetorical tactics that may be available for managers to create value during times of heightened earnings uncertainty. This article contends that warm-glow rhetoric may be another way to mitigate investors’ negative reactions to earnings surprises, as warm-glow theory suggests that individuals are willing to make suboptimal economic choices when they receive warm-glow payouts. Hypotheses drawing on warm-glow theory and the incremental useful information perspective are developed and tested using computer-assisted text analysis (CATA) and event study methodology on a longitudinal sample of 1920 calls, and it is suggested that warm-glow rhetoric positively moderates the relationship between earnings surprises and financial performance (as measured through cumulated abnormal returns). The findings illustrate how the warm-glow effect can be used as an unconventional, yet effective tactic with which managers can create market value. A discussion of the findings and their implications for theory and practice concludes the study.