Former Worldcom CEO Bernard EbbersLOUIS LANZANO/The Associated Press
If you ever hear your boss use the phrase "what an incredible year the company has had," when reporting the latest results, it might be time to dust off your résumé, a new study suggests.
Using inflated language and third-person phrases such as "the team" and "the company" rather than "I" and "we" can be verbal tip-offs that an executive is lying or covering up a bad situation, according to a new study by David Larcker, director of the corporate governance research program at Stanford University's Graduate School of Business, and doctoral student Anastasia Zakolyukina.
Fibbing execs are more likely to talk in generalities rather than specifics, according to an analysis of 30,000 transcripts of executive conference calls about earnings from 2003 to 2007. Over all, 14 per cent of executives made statements that raised caution flags and about half of their companies later had to restate their earnings.
"It's an age-old question to determine whether someone is lying. The breakthrough in this study is that we could use a computer to look at a huge sample of statements and find words that raise red flags that there is deception going on," Professor Larcker said.
The study found execs who later revised their firm's financial statements displayed distinct styles of speech, including language that "disassociates themselves from their subject matter," Prof. Larcker said. CEOs and CFOs who were deceptive used significantly fewer self-references and more third-person plural and impersonal pronouns, the study found.
For example, "rather than say 'I know' or 'I'm sure,' top executives at companies that later ran into trouble were most likely to refer the authority to someone else, saying 'our auditors say', or 'this has been certified,'" Prof. Larcker said.
"A particular feature of statements that later proved inaccurate was the use of hyperbole with value-laden words like 'fantastic' and 'outstanding.' When you hear words like 'incredible' and 'unbelievable', they may be tip-offs that what the leader is saying really does strain credibility," Prof. Larcker said.
A closer examination of several of the deceptive statements found that the speakers tended to use the shortest sentences, and had the least amount of hesitation between statements. The authors suggest that is because they had rehearsed phrases they wanted to use before the conference call.
One such transcript identified in the study was a conference call with Erin Callan, the former chief financial officer of Lehman Brothers a few months before the company collapsed. She used the word "great" 14 times, "strong" 24 times and "incredibly" eight times to describe the bank's performance. She also used the word "challenging" six times.
The results have practical applications for employees as well as clients of companies, Prof. Larcker said. "In a sense you are placing a bet on the long-term viability and reliability of a company as an employer and a supplier. If what a you hear from management gets more third person and vague it raises questions that all may not be as rosy as management is indicating.
He cautioned that the findings are by no means definitive. "I can't say these are check boxes and when you see four you have hit trouble," he said. "That said, they are an intriguing indication of potential trouble ahead."
The researchers plan a follow-up study to determine whether it's possible to use the wording of statements as an investment strategy to drop potentially risky companies from your portfolio, Prof. Larcker said. "If the statements indicate that the figures are not correct, you are wise to drop ... some of the firms whose statements include early warnings that there is risk you don't know about. That's especially important in an economy that is moving sideways."