Failure To Communicate

Based on research by Patricia Naranjo, Francois Brochet and Gwen Yu

• First-rate command of English language is essential for overseas firms that deal with capital markets in conference calls.
• Analysts rely on clear English skills to assess risks and opportunities.
• Conference calls from countries where the language is linguistically furthest from English are more opaque, which in turn mutes the trading response.

Nineteenth century philologist L.L. Zamenhof dreamed of ending global misunderstanding. His solution: a brand new language, Esperanto. Zamenhof’s plan never took off, of course. But global business could probably use it.

In a groundbreaking new study, Patricia Naranjo, a professor at Rice Business, joined François Brochet of Boston University and Gwen Yu of Harvard University to look at the way language problems in conference calls can affect the stock price of a given firm.

Language barriers, the team demonstrated, are linked to lower information content for potential investors, which leads to a subdued market reaction during the time the conference call is taking place.

The implications for profit making are clear. But the research also has an ethical component. In 1998, the Securities and Exchange Commission established guidelines for English usage called the Plain English Initiative. All investment products come with risks, the SEC reasoned, and investors can’t be fully informed unless the data are stated plainly.

Scholars, too, have for years called for better analysis of international corporate disclosures. But most studies on the topic examine earnings releases. Those that specifically look at conference calls consider calls within the United States. Naranjo and her colleagues instead tackled the complex give-and-take of calls that included international players.

To measure the quality of English in conference calls, and its effects on the markets, Naranjo’s team analyzed a sample of 11,305 conference call transcripts from non-U.S. firms between 2001 and 2010. Sifting through the transcripts, they kept only those from the hours when the markets were open. Then they tracked the speakers’ grammatical errors and the market activity while the call took place. The goal was to sound out market reaction to the conference calls’ language.

The reaction was loud and clear. The more an executive’s national language differed from English — say, if she was Italian or Japanese — the less linguistic clarity there was during a conference call.

Unsurprisingly, managers from countries such as Japan and Italy were more prone to use expressions that didn’t quite make sense in English. They also made more errors in grammar. Managers from the United Kingdom, Australia or India, meanwhile, used clearer English.

But why do bad similes and clumsy verb tenses affect trading? It’s because a lot more happens in a conference call than the dry reading of figures. These conversations are a manager’s chance to explain the meaning of the financials she is presenting. Analysts, especially those who live outside of a firm’s home country, rely heavily on these calls for clear information. When the language in these talks gets muddy, confidence in the information presented plunges. Trading drops as a result.

The opposite happens when an executive sounds like she attended Cambridge or Rice. She’s far less likely to make language mistakes, of course. The market also reacts more strongly to the information presented. To put it quantitatively: During a conference call question and answer period, a one-standard-deviation rise in language clarity led to a 3.76 percent rise in abnormal trading.

Naranjo’s research speaks volumes to overseas firms that rely on capital markets. As long as English rules as the linguistic coin of the realm, it pays to train executives to speak fluent English, or to factor existing English language ability as a coveted job skill. L.L. Zamenhof was a student of language, not finance. But his 19th century analysis of individual behavior accurately described the human hive-mind that is the market. When language fails, Zamenhof knew, misunderstanding and error soon follow. And in the end, numbers will tell the tale.

Patricia Naranjo is an assistant professor of accounting at Jones Graduate School of Business at Rice University.

To learn more, please see: Brochet, F., Naranjo, P., & Yu, G. (2016). The capital market consequences of language barriers in the conference calls of non-U.S. firms. The Accounting Review, 91(4), 1023–1049.