RESEARCH – 21 January 2025
Questioning the Answers: LLMs enter the Boardroom
An earnings call Q&A is a dialogue between executives and sell-side analysts, with shareholders watching closely. When analysts ask about topics not addressed in the prepared remarks, it may suggest that executives either overlooked these issues or chose to avoid them. The way executives respond in these moments is equally revealing. Transparent answers build trust. Evasive answers raise concerns.
Large Language vector embeddings of 192,000 earnings calls were used to score executives on: (1) proactiveness, proxied by how well the prepared remarks addressed analysts' questions, and (2) on-topic alignment, proxied by whether executives’ responses remained on-topic to the question.
- Firms with on-topic executives outperformed off-topic peers by 390 bps/year in a long/short portfolio.
- Proactive executives outperformed reactive peers by 170 bps/year in a long/short portfolio.
- Combining both factors yielded 506 bps/year in a long/short portfolio
- Proactive, on-topic firms saw superior future gross profit growth during the backtest period. Clear, aligned communication reflects strong governance, which entrenches a firm's economic moat.
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