Investors familiar with the markets have a general understanding of how and why stocks go up and down, usually explained in terms of supply and demand. However, opinions on what specifically causes demand can be quite different.
Perhaps one of the most interesting of these factors is the tone of CEOs. A study shows that when CEOs include jokes in earnings announcements, it positively affects stock prices.
Humor boosts stock prices
According to George Glover of Marketsinsider, CEOs should joke more in earnings announcements because research shows that stocks perform better under such circumstances.
According to an article published in the Review of Accounting Studies, it may be time for CEOs to start joking more. Researchers used machine learning tools to analyze a sample of just under 12,000 earnings calls and found that executives showing a sense of humor can instantly boost their companies' share prices.
In their paper, Andrew Call, Rachel Flam, Joshua Lee, and Nathan Sharp write, "When executives use humor in an earnings release, stock market returns and analyst forecast revisions following the call are more positive. This is primarily because there is a muted reaction to negative earnings news," they write: "Humor has an important relationship with the immediate stock market reaction, subsequent analyst behavior and future firm performance."
High performance over the next 2 days
According to the study, stocks perform better in the two-day period after an earnings announcement when executives joke. CEOs with a sense of humor "can soften the release of negative news and signal relatively stronger future firm performance," the researchers say.
Despite the researchers' findings, quarterly checks with analysts are often laugh-free, with only 12 percent of them finding an element of humor, according to the newspaper.
The net effect of pessimism
It may be worth taking a closer look at an example that confirms this research, albeit from the opposite pole. Tesla's boss Elon Musk seemed rather pessimistic in his third-quarter earnings release in October, warning of potential threats to the US economy and delivering a speech in which he admitted that the electric vehicle maker was probably 'digging its own grave' with Cybertruck.
Analysts called the call a 'mini-disaster' and criticized Musk for acting like a 'little baby'. As a result, Tesla shares plunged 13 percent in the two days following the nightmarish call, wiping out nearly $100 million in market capitalization. This example is a lesson that CEOs, even if they lack a sense of humor, should at least not pump investors with pessimism in their earnings announcements.
