Wednesday, August 18, 2010

An Article You Should Check Out: The language of lying

For those of you that are interested in Statement Analysis and/or those of us that use the LIWC2007 software program to analyze and conduct research in the area of word choice (and deception) this is a great article to check out.

The language of lying

"Executives who fudge the truth can be given away by the words they choose, new research suggests..."

For the actual paper search on the following:
Detecting Deceptive Discussions in Conference Calls

David F. Larcker
Stanford University - Graduate School of Business

Anastasia A. Zakolyukina
Stanford Graduate School of Business

July 29, 2010

Rock Center for Corporate Governance at Stanford University Working Paper No. 83

We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label the Question and Answer section of each call as "truthful" or "deceptive". Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample performance of the models that are based on CEO or CFO narratives is significantly better than random by 4%- 6% (with 50% - 65% accuracy) and provides a significant improvement to a model based on discretionary accruals and traditional controls. We find that answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self-references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words.

Keywords: Deception, Restatements, Linguistic Analysis◦