When: The Scientific Secrets of Perfect Timing(5)
At Campbell Soup and all public companies, the stakes are high for earnings calls. How analysts react—did the CEO’s comments leave them bullish or bearish about the company’s prospects?—can send a stock soaring or sinking. “You have to thread the needle,” Conant told me. “You have to be responsible and unbiased, and report the facts. But you also have a chance to champion the company and set the record straight.” Conant says his goal was always to “take uncertainty out of an uncertain marketplace. For me, these calls introduced a sense of rhythmic certainty into my relationships with investors.”
CEOs are human beings, of course, and therefore presumably subject to the same daily changes in mood as the rest of us. But CEOs are also a stalwart lot. They’re tough-minded and strategic. They know that millions of dollars ride on every syllable they utter in these calls, so they arrive at these encounters poised and prepared. Surely it couldn’t make any difference—to the CEO’s performance or the company’s fortunes—when these calls occur?
Three American business school professors decided to find out. In a first-of-its-kind study, they analyzed more than 26,000 earnings calls from more than 2,100 public companies over six and a half years using linguistic algorithms similar to the ones employed in the Twitter study. They examined whether the time of day influenced the emotional tenor of these critical conversations—and, as a consequence, perhaps even the price of the company’s stock.
Calls held first thing in the morning turned out to be reasonably upbeat and positive. But as the day progressed, the “tone grew more negative and less resolute.” Around lunchtime, mood rebounded slightly, probably because call participants recharged their mental and emotional batteries, the professors conjectured. But in the afternoon, negativity deepened again, with mood recovering only after the market’s closing bell. Moreover, this pattern held “even after controlling for factors such as industry norms, financial distress, growth opportunities, and the news that companies were reporting.”8 In other words, even when the researchers factored in economic news (a slowdown in China that hindered a company’s exports) or firm fundamentals (a company that reported abysmal quarterly earnings), afternoon calls “were more negative, irritable, and combative” than morning calls.9
Perhaps more important, especially for investors, the time of the call and the subsequent mood it engendered influenced companies’ stock prices. Shares declined in response to negative tone—again, even after adjusting for actual good news or bad news—“leading to temporary stock mispricing for firms hosting earnings calls later in the day.”
While the share prices eventually righted themselves, these results are remarkable. As the researchers note, “call participants represent the near embodiment of the idealized homo economicus.” Both the analysts and the executives know the stakes. It’s not merely the people on the call who are listening. It’s the entire market. The wrong word, a clumsy answer, or an unconvincing response can send a stock’s price spiraling downward, imperiling the company’s prospects and the executives’ paychecks. These hardheaded businesspeople have every incentive to act rationally, and I’m sure they believe they do. But economic rationality is no match for a biological clock forged during a few million years of evolution. Even “sophisticated economic agents acting in real and highly incentivized settings are influenced by diurnal rhythms in the performance of their professional duties.”10
These findings have wide implications, say the researchers. The results “are indicative of a much more pervasive phenomenon of diurnal rhythms influencing corporate communications, decision-making and performance across all employee ranks and business enterprises throughout the economy.” So stark were the results that the authors do something rare in academic papers: They offer specific, practical advice.
“[A]n important takeaway from our study for corporate executives is that communications with investors, and probably other critical managerial decisions and negotiations, should be conducted earlier in the day.”11
Should the rest of us heed this counsel? (Campbell, as it happens, typically held its earnings calls in the morning.) Our moods cycle in a regular pattern—and, almost invisibly, that affects how corporate executives do their job. So should those of us who haven’t ascended to the C-suite also frontload our days and tackle our important work in the morning?
The answer is yes. And no.
VIGILANCE, INHIBITION, AND THE DAILY SECRET TO HIGH PERFORMANCE
Meet Linda. She’s thirty-one years old, single, outspoken, and very bright. In college, Linda majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and participated in antinuclear demonstrations.
Before I tell you more about Linda, let me ask you a question about her. Which is more likely?
a. Linda is a bank teller.
b. Linda is a bank teller and is active in the feminist movement.
Faced with this question, most people answer (b). It makes intuitive sense, right? A justice-seeking, antinuke philosophy major? That sure sounds like someone who would be an active feminist. But (a) is—and must be—the correct response. The answer isn’t a matter of fact. Linda isn’t real. Nor is it a matter of opinion. It’s entirely a matter of logic. Bank tellers who are also feminists—just like bank tellers who yodel or despise cilantro—are a subset of all bank tellers, and subsets can never be larger than the full set they’re a part of.* In 1983 Daniel Kahneman, he of Nobel Prize and DRM fame, and his late collaborator, Amos Tversky, introduced the Linda problem to illustrate what’s called the “conjunction fallacy,” one of the many ways our reasoning goes awry.12