Words that are bad for business
Is presenting numbers to make them seem better than they are bad for business? Research finds that the consequences of the practice depends on the words leaders use to present them.
Language and Financial Reporting:
New study uses methods from linguistics, the study of natural languages and speech, to reveal the dangers of overselling bad numbers.
All companies of a certain size must report the state of their finances to owners and authorities. The accuracy of the numbers is essential for anyone who already has shares or is considering investing in the business, and consequence of making errors can be serious – even if done with good intentions.
Nevertheless, there will always be a certain room for interpretation and practice may vary. This is partly what makes financial reporting an interesting area for researchers. The bookkeepers may have different motivations for the way they report. How is the line drawn between what is legal and not?
"Big baths" make leaders shine
There are laws that regulate financial reporting, but the practice of making numbers look better than they are in reality isn’t necessarily illegal. Some companies “clean” their numbers by writing off and writing down certain assets for the duration of a quarter. So-called big baths often happen when things are already going bad, to make future positive results appear even better.
This way, new CEOs can blame their predecessor for poor results and take credit for the increase in the next period. In addition to the manager being put in a better light and potentially getting higher bonuses, a higher increase from one quarter to another can have a positive impact on the reputation of the company. But that's also why it misleads potential investors that need to be able to assess the company's profitability. Auditors who are responsible for verifying the numbers are not to happy about the practice either.
Studied leaders' choice of words
Grey zones and the opportunity to increase the reputation of the CEOs and companies thus keep the trend alive. But what is the consequence of this fogging of numbers? That’s the question researchers at the Department of Accounting, Auditing and Business Analytics set out to answer.
In the study, Professor Ole-Kristian Hope and PhD fellow Jingjing wanted to find out whether CEO's credibility affects how investors perceive the inaccurately reported numbers. To do this, they performed a linguistic analysis of meetings where quarterly reports were presented by the CEO of a company. Specifically, they looked at what kind of words they used to describe numbers that appeared to be better than they were in reality.
The numbers didn't speak for themselves
Their findings clearly showed that investors responded differently to the fogging of the numbers if they experienced the CEO's use of language as deceptive. Certain words and expressions appeared to be directly related to a decline in investments in the company.
The deceptive language either came in the form of extremely positive words such as fantastic, phenomenal, incredible, and unique. Or, it was typically phrases referring to something being common knowledge like "everyone knows", "shareholders will agree to" and "you know".
Liquidity, the ability to pay, fell as much as 9% in these companies, compared to companies where the CEOs were considered more credible. Leaders must therefore heed their own words when presenting quarterly reports. If perceived as cunning, it can affect the economy of the company.