The CEO words investors refuse to buy

Ole-Kristian Hope

Have you ever heard a manager praise their company’s «tremendous», «awesome» or «unbelievable» results? New research shows that CEOs should mind their language.


In accounting, a big bath refers to the practice when companies decide to «wash the numbers» by making large write-offs and write-downs on certain items in an earning period, such as asset values or restructuring charges.

Companies usually do this in an earning period that is already poor and it has become a popular method for making future positive earnings appear even better when compared to previous results.

But what happens when CEOs use positive language to hide bad news and deceive their shareholders?

Investigating managers’ truthfulness

In a study I recently conducted together with my PhD student Jingjing Wang from the Rotman School of Management, we used methods such as linguistic analysis from earnings-conference calls to measure managerial deception.

Our goal was to investigate whether managers’ truthfulness, or conversely, their deceptiveness, affects how investors perceive these big baths.

While big baths can be used for valid purposes, for example to «clear the air» by realigning a firm’s accounting numbers with their actual economics values, they can also be used to make CEOs with healthy performance bonuses look good in subsequent earnings periods.

For these managers, there is hardly any difference between looking bad or very bad in June, as long as they can look like world-beaters in September.

Deceitful language with consequences

Our study found that investors respond very differently to big baths taken by CEOs depending on how deceptive they perceive them to be.

We found a bigger drop in market activity in cases where these CEOs used certain words and phrases in their conference calls with analysts and investors. Compared to companies where managers were seen as more truthful, stock liquidity dropped by 9 percent.

These deceitful words and phrases were either extremely positive (i.e. awesome, phenomenal, unbelievable, tremendous) or those assuming common knowledge (i.e. everybody knows, shareholders would agree, you know).

Managers considering wavering back and forth between honesty and deceit should reconsider. The drop was even bigger for the CEOs who had been perceived as truthful in one period, but deceptive a year later.

Our study demonstrates how we can distinguish management incentives in instances where a big bath has occurred.

It should also serve as a reminder for any manager out there who has doubts about the power of words: Investors can spot which managers that are deceptive and they will react accordingly.

Only a small number of academic publications ranks as the best in their field world-wide. Last year, 16 BI researchers published papers in these ABS4* journals. These journals are considered among the highest in terms of impact factor and have the highest requirements of data and rigour in theory. Throughout 2019, we highlight these academics, their research and its impact on society.


Hope, Ole-Kristian & Wang, Jingjing. (2018). Management deception, big-bath accounting, and information asymmetry: Evidence from linguistic analysis. Accounting, Organizations and Society 2018.

Published 7. June 2019

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