Options Speak Louder Than Words : Strategic Negativity in Earnings Calls Prior to Option Grants

Abstract

We investigate whether executive compensation affects disclosure during earnings conference calls. In particular, we hypothesize that executives who have an upcoming option grant will use overly negative language in earnings calls, intending to temporarily depress their companies stock price and obtain a lower strike price on their options. The sentiment during earnings calls is measured with both dictionary-based approaches as well as with the FinBERT and RoBERTa large language models. Our main finding is that executives use more negative language in conference calls in the quarter preceding their option grant than on average. A causal inference is made by leveraging distinct characteristics in multi-year option schedules and by conducting placebo tests with pseudo-option grant dates to validate our results. We learn that executives that stand to benefit from a temporarily reduced stock price will exhibit opportunistic behavior by adopting an excessively pessimistic tone in earnings calls.