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«Internal and External Attributions by Managers in Earnings Conference Calls by Zhenhua Chen Business Administration Duke University Date:_ Approved: ...»

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Internal and External Attributions by Managers in Earnings Conference Calls


Zhenhua Chen

Business Administration

Duke University




William Mayew, Co-chair


Mohan Venkatachalam, Co-chair


Robert Ashton


Richard Larrick

Dissertation submitted in partial fulfillment of

the requirements for the degree of Doctor of Philosophy in Business Administration in the Graduate School of Duke University i v ABSTRACT Internal and External Attributions by Managers in Earnings Conference Calls by Zhenhua Chen Business Administration Duke University Date:_______________________



William Mayew, Co-chair ___________________________

Mohan Venkatachalam, Co-chair ___________________________

Robert Ashton ___________________________

Richard Larrick An


of a dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business Administration in the Graduate School of Duke University Copyright by Zhenhua Chen Abstract In this study, I examine whether managers make self-serving attributions by internally (externally) attributing favorable (unfavorable) performance or demonstrate leadership by accepting blame and deflecting praise when communicating with analysts and investors. After validating the attribution measure I use in this paper, I find that managers tend to attribute favorable performance to internal factors and unfavorable performance to external factors, consistent with self-serving attribution being the dominant force. I also find that investors react negatively to mangers’ internal attributions. Further analysis reveals that more internal attributions are associated with lower earnings persistence.

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List of Tables


1. Introduction

2. Related Research and Hypothesis Development

3. Research Design and Data Construction

4. CEO Attribution Measure

5. Construct Validity of the Attribution Measure

5.1 Manual Coding of Management Attributions during Earnings Conference Calls32

5.2 Internal and External Attributions and Personal Pronouns

6. Firm Performance and Managers’ Attributions during Earnings Conference Calls..... 41

7. Market Reaction and Analyst Forecast Revisions to Managers’ Attributions............... 48

8. Managers’ Attributions and Earnings Persistence

9. Managers’ Attributions and Future Stock Returns

10. Managers’ Attributions and CEO Compensation

11. Further Empirical Tests

12. Robustness Tests

12.1 Attributions in Causal Reasoning Statements

12.2 Alternative Method of Identifying Self-serving Attributions

12.3 Using IvsWE as an Alternative Attributions Measure

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13. Conclusions

Appendix A

Appendix B:



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Table 2: Descriptive Statistics of Linguistics Variables

Table 3: Descriptive Statistics of Manual Coding Sample

Table 4: Personal Pronouns and CEO Attributions

Table 5: The Association between Firm Performance and Managers’ Attributions.......... 44 Table 6: The Association between Management Attributions and Contemporaneous Stock Returns

Table 7: The Association between Management Attributions and Analyst Forecast Revisions

Table 8: The Association between Managers’ Attributions and Earnings Persistence..... 57 Table 9: Managers’ Attributions and Future Stock Returns

Table 10: Managers’ Attributions and CEO Compensation

Table 11: High Attenuation and Management Attributions

Table 12: Firm Performance and Managers’ Attributions in Causal Reasoning Statements

Table 13: Descriptive Statistics of Self-serving Attribution Sentences

Table 14: IvsWE as an Alternative Attribution Measure

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guidance and mentoring during my doctoral study at Duke University. I thank my dissertation committee members, Bob Ashton, Rick Larrick, Bill Mayew (co-chair), and Mohan Venkatachalam (co-chair) for their invaluable comments that have greatly improved this paper. I also appreciate support from other faculty members and fellow doctoral students at Duke University’s Fuqua School of Business.

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financial reporting and disclosure. In this paper, I empirically investigate how managers attribute firms’ operating results when communicating with financial analysts and investors. Prior literature in social psychology and leadership offers different predictions on how managers will provide attributions to outsiders. Using a novel approach to identify CEO attribution, I study CEO attributions in a large sample that includes 50,434 earnings conference calls. I also examine how investors and financial analysts react to management attribution and whether attributions are related to earnings persistence.

When discussing financial performance with investors, managers could either attribute outcomes to internal factors such as business strategies and personal efforts or to external factors such as the macroeconomic environment, customer demand, and competition. These attributions may provide valuable information to help investors evaluate firm and management performance. Prior research documents that management forecasts accompanied with explanations are associated with stronger price reaction (Baginski et al. 2004), suggesting that management attributions are relevant for investor decisions.

There is very little research on managerial attributions and hence how managers make attributions remains an open question (Koonce et al. 2011). There are competing theories that predict different attribution behavior by managers. Social psychology research suggests that people exhibit self-serving biases in making attributions. In other words, human beings tend to internally attribute favorable outcomes and externally attribute unfavorable outcomes (Försterling 2001; Miller and Ross 1975). In contrast, organizational behavior and leadership literature argues that as business leaders, managers should behave precisely the opposite way by deflecting praise when outcomes are favorable and accepting blame when outcomes are unfavorable (Collins 2001; Lee and Tiedens 2001; Lee et al. 2004; Morris et al. 2005; Ou 2011). Collins (2001) argues that personal humility, evidenced by deflecting praise, helps CEOs to successfully lead firms.

Morris et al. (2005) articulate that humility brings supportive relationship between managers and employees and thus leads to improved future performance. Recent empirical research by Ou (2011) finds that CEO humility is positively related to middle manager ambidexterity and job performance.

Lee et al. (2004) focus on attributions in the presence of negative events, and argue that when negative events occur, making external attributions leads investors to believe that these events are out of the control of managers. Thus it is optimal for managers to make internal attributions for unfavorable results in order to convince investors that the company is able to act to prevent those results in the future. Lee et al.

(2004) find that firms that make “self-disserving” attributions in their annual reports have higher stock prices in the future, suggesting that CEOs, as business leaders, should demonstrate leadership when they communicate with investors and analysts by internally attributing negative outcomes.

CEOs are both human beings and leaders. As human beings, it is likely that they suffer from the same self-serving attribution bias. As leaders of corporations, they are expected to demonstrate leadership by deflecting praise for good performance and taking blame for bad performance. As such, it is unclear which force is more descriptive in CEOs’ communication with analysts and investors.

I study management attributions in a large sample by adopting a new approach to measuring attributions. I use the personal pronouns spoken by CEOs during earnings conference calls as a proxy for management attributions. This methodology enables me to examine management attribution in a large sample of earnings conference calls. Using Linguistic Inquiry and Word Count (LIWC) 2007, a text analysis software that analyzes written or spoken samples on a word-by-word basis, I construct a measure of management attributions. Before applying this measure in a large sample investigation, I first examine the construct validity of the LIWC-based attribution measure by comparing it with an attribution measure based on human coding. In particular, I select 80 earnings conference call transcripts from my sample and manually code the attribution sentences spoken by managers during these calls. I classify these attributions as internal or external based on human judgment and compare these judgments to the LIWC-based measure. I find that internal attributions are characterized by more frequent use of first-person pronouns and external attributions by third-person pronouns. A simple model using the LIWC-based attribution measure discriminates among manually coded internal and external attributions with 74% accuracy. This offers some assurance that the LIWC-based measure has some construct validity when proxying for management attributions in conference calls.

The findings regarding my main hypothesis are as follows. I find evidence consistent with managers attributing good earnings performance to internal factors and bad earnings performance to external factors. This pattern is robust to controlling for firm characteristics. I also document that investors react negatively to managers’ internal attributions, while financial analysts do not incorporate management attributions in their future earnings forecasts. Further analysis reveals that internal attributions are related to lower earnings persistence, suggesting that market reaction is rational.

Kim (2011) finds that self-serving CEOs are more likely to be fired. To investigate why CEOs make self-serving attributions even though the stock market and labor market punish them for doing so, I conduct further analysis to examine whether CEO attributions vary with CEO and firm characteristics. Empirical results show that CEOs make less self-serving attributions when CEOs have been with the firm for a shorter time, and when their firms experience higher revenue growth, suggesting that selfserving attribution bias is attenuated when CEOs are more concerned about labor market and stock market consequences.

This paper makes the following contributions. First, this is one of the first large sample studies to examine how managers explain firm performance when they communicate in real time with investors and analysts. Despite the prevalence of causal reasoning in financial statements, there has been very little research done to analyze the determinants and consequences of these explanations (Koonce et al. 2011). This paper documents evidence consistent with the idea that managers make self-severing attributions in earnings conference calls, suggesting that managers are subject to the same behavioral biases as the general population even though they are business leaders.

Second, I document that more internal attributions are perceived by investors as a negative signal and show that internal attributions are related to lower earnings persistence. This provides evidence that management attributions help investors make resource allocation decisions. Third, this paper validates the use of personal pronouns to proxy for managerial attributions. This may provide a useful tool for future researchers to study managerial attributions in earnings conference calls and other disclosure outlets.

The large sample analysis reported here complements other recent studies examining managers’ attribution behaviors, either in small samples or specialized settings. Most studies adopt the content analysis approach. For example, Baginski et al.

(2004) study attributions accompanied with management earnings forecasts and find that these attributions are useful to investors as evidenced by stock market reaction.

However, their results are limited by data requirement and potential measurement error due to human coding (p. 27). This paper enhances our understanding of management attributions by examining a large sample of conference calls and improves the generalizability of the empirical results. (Keusch et al. 2012) examine how firms explain their performance during economic crisis by studying the letters to shareholders in annual reports in Europe. They find a crisis leads to more extensive self-serving bias and suggest that CEO attributions are not intended to provide truthful information but rather to mislead investors. (Marques and Tavares 2012) examine CEO attributions in response to the terrorist attacks of September 11 and the Iraq war. Their paper extends the experimental findings by (Barton and Mercer 2005) and suggests that attributing bad performance to external factors may backfire if investors do not believe the explanation is plausible.

The evidence presented here also complements the large sample analysis reported in contemporaneous work by Li (2010), who examines management attributions in a large sample of Management Discussions and Analysis (MD&A) of 10K filings. Both Li (2010) and this paper find similar results that managers tend to attribute good performance to internal factors and poor performance to external factors, confirming that the self-serving attribution bias exists in both earnings conference calls and in annual reports. However, this paper differs from Li (2010) in the following ways.

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