How negative tones in earnings calls shape media narratives

Purpose - This study investigates the relationship between earnings call sentiment and subsequent media coverage sentiment. Examining these synergistic effects between executive communication style and resulting news narratives provides novel insights. The unscripted qualitative discussions in earnings calls establish perceptions and outlooks that the media echoes in later coverage. Understanding these intricate connections between information channels aids communication experts and market analysts in shaping strategic messaging and predicting market impacts. In addition, the link with the stock return reaction is revisited, and this study shows that the effects on stock returns driven by news information are moderated by earnings call sentiments. Design/methodology/approach - This study analyzes the interplay between earnings call sentiments and subsequent news sentiments for 30 S&P 500 companies from 2012 to 2022. Utilizing the FinBERT Natural Language Processing (NLP) model, we extract sentiment scores from earnings call transcripts and corresponding news articles. We apply OLS regression models to examine the relationship between negative earnings call sentiments and subsequent negative news sentiments, as well as their combined impact on stock returns. Control variables include financial metrics such as ROA, ROE, firm size, Market-to-Book ratio and liquidity. The methodology allows for a nuanced exploration of sentiment transfer mechanisms in financial communication and their market implications. Findings - Our study reveals a significant positive correlation between negative sentiment in earnings calls and subsequent negative news sentiment. A 1% increase in negative call sentiment associates with a 0.54% increase in negative news sentiment the following day, supporting Agenda Building and Impression Management hypotheses. We observe a multiplicative effect on stock returns when negative call sentiment coincides with negative news sentiment, supporting signaling theory. Financial metrics like ROE show marginal influence on news sentiment, while others demonstrate insignificant impact. These findings underscore the importance of holistic corporate communication management in mitigating potential negative market reactions. Research limitations/implications - This study’s primary limitation is its sample size of 30 S&P 500 companies, potentially limiting generalizability. The use of a single sentiment analysis model (FinBERT) could impact results, warranting comparison with alternative methods. The study’s timeframe (2012–2022) may not capture the most recent market dynamics. Future research could expand the sample size, incorporate additional sentiment analysis techniques and explore longer-term effects. Investigating industry-specific variations and the impact of macroeconomic factors could provide further insights. Additionally, qualitative analysis of earnings call content could complement these quantitative findings, offering a more comprehensive understanding of sentiment transfer mechanisms. Practical implications - This study offers insights for corporate communicators, investor relations professionals and financial analysts. The strong correlation between earnings call sentiment and subsequent news sentiment emphasizes the need for management of corporate messaging during these calls. Companies should be aware that negative sentiments expressed in earnings calls may amplify through news coverage, potentially impacting stock performance. Investors and analysts should consider both earnings call and news sentiments when evaluating market reactions. For regulators, these findings highlight the importance of monitoring information dissemination practices to ensure market fairness. Overall, the study underscores the significance of a holistic approach to financial communication strategy. Social implications - This research highlights the interconnected nature of corporate communication and media narratives, emphasizing social responsibility of both corporations and news outlets. The findings suggest that negative corporate messaging can perpetuate and amplify through news coverage, potentially affecting public perception and investor sentiment. This underscores the need for transparent and ethical communication practices in the business world. The study also raises awareness about the potential manipulation of public opinion through carefully crafted corporate narratives. It encourages stakeholders to critically evaluate both corporate communications and subsequent media coverage, promoting a more informed and discerning society in the context of financial information dissemination. Originality/value - This study uniquely explores the interplay between earnings call sentiments and subsequent news sentiments, addressing a significant gap in financial communication research. By examining the sentiment transfer mechanism from corporate messaging to media narratives, it provides novel insights into information dissemination in financial markets. The research demonstrates how negative sentiments in earnings calls can amplify through news coverage, offering valuable implications for corporate communication strategies. This multifaceted analysis contributes to a deeper understanding of the complex relationships between corporate communication, media coverage and market behavior.