Formalizing this kind of intuitive linguistic knowledge, two Stanford professors have set out some interesting parameters for detection of CEO and CFO deception in just that venue.
The parameters are based on an analysis of 29,663 transcripts of quarterly earnings calls that U.S. public companies held between 2003 and 2007: an overall 17,150 instances of CEO-speak, and 16,032 CFO statements in management discussions and Q&A segments. The result is a model that the researchers find to be as much as 16% more predictive of deception than would be found in a random approach.
"The language composition of truthful narratives differs from that of false narratives," write David F. Larcker, of Stanford Graduate Business School's Rock Center for Corporate Governance, and Stanford Graduate School's Anastasia A. Zakolyukina, in a .
The paper is a must-read for those of us who like appendices listing all kinds of words. More importantly, it offers some useful tips for investors seeking to detect falsehood, and executives looking to burnish credibility.
Deceptive CEOs and CFOs, identified in the research as those needing to file subsequent restatements, were in some respects found to have a lot in common. Both were found to use "more references to general knowledge" including phrases like "you know" and "everybody knows," fewer "non-extreme positive emotion words (love, nice, accept) and fewer references to shareholder value" than their presumably more honest colleagues.
But there are also differences.
Deceptive "CEOs use more extreme positive emotion words (fantastic, great, definitely) and fewer anxiety words" than CFOs, who tend to go for "more negation words and for the most description deception criterion they use more extreme negative emotion words (absurd, adverse, awful) and swear words (swear, screw, hell)."
In addition, deceptive narratives of CFOs were found to contain fewer self-references, fewer third person personal pronouns and fewer impersonal pronouns. "The prior literature suggests that the use of first-person singular pronouns implies an individual's ownership of a statement, whereas liars try to dissociate themselves from their words," the paper notes.
The statements of lying CFOs were also found to go on at greater length than those of CEOs. "There is strong evidence on the positive association for word count and the probability of deception for CFOs but not for CEOs," the study shows.