Formal and Informal Language in Earnings Conference Calls

Abstract

Formal language can be viewed as dull and uninteresting, especially in verbal contexts, while informal language is often seen as more engaging for listeners and easier to understand. Using a formality measure from linguistics, this paper investigates whether the use of informal language in earnings conference calls clarifies or obscures information. We find that informal language is associated with more divergent beliefs among investors. Moreover, both stock market returns and analyst forecast revisions following these calls tend to be more negative, suggesting that investors and analysts are wary of firms using informal language. Further analysis indicates that the use of informal language is associated with lower subsequent earnings, more negative earnings surprises, and lower returns around subsequent earnings announcements. These findings suggest that managers employ informal language not to enhance clarity but, rather, to strategically obscure bad news. This paper contributes to our understanding of linguistic choices in corporate disclosure and introduces a new linguistic measure to the accounting and finance literature.