How to Quantify Your Gut Reactions in Credit

This article originally appeared in Credit Today, the leading publication for the credit professional.
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All of us in credit will, at some time or another, find ourselves in a position where we need to ask probing questions of a potentially problematic customer. And some credit execs we know – when the exposure justifies it – listen in on analyst conference calls hosted by their public company customers.

Much time and effort is devoted to figuring out the right questions to ask, and then to analyzing the answers received. But what about another, perhaps more important question: Is the person telling the truth at all?

Most credit execs we know have amazingly sensitive and accurate internal B.S. detectors (pardon the French, but that’s what this is all about). For some reason, that skill seems to come with the territory. Or maybe it’s learned over the years. Of course, that’s the “gut feeling” that we all know about. And we can also attest that gut feelings are rarely wrong.

That said, thought, we’ve always been of the mind that being able to QUANTIFY your gut feelings is the best way to go.

Which brings us to a study released a couple of years ago by David F. Larcker, professor of accounting at Stanford University, entitled “Detecting Deceptive Discussions in Conference Calls,” which offers up some ways to “quantify your gut feelings.” This study specifically focuses on conference calls for public companies (in part because the data was public and could be analyzed), but the lessons-learned from this study are worth noting for ANY communication you’ll hear from a company executive.

  • Lying Tip 1 – For example, if, when listening to a company official, you hear phrases like “the team” and “the company” over “I” and “we,” that’s a linguistic cue that they could be lying. Larcker’s study found that executives who later revised their firm’s financial statements displayed distinct styles of speech in analyst calls, including language that “disassociates themselves from their subject matter.”
  • Lying Tip 2 – Less than truthful execs also tended to speak in generalities rather than specifics, and replaced common adjectives like “good” and “respectable” with effusive adjectives like “incredible.”

To conduct his study, Larcker’s team loaded 30,000 transcripts of public conference calls from 2003 to 2007 onto an electronic document, which they then analyzed for phrases psychologists and linguists usually associate with deception. Fourteen percent of the executives analyzed said something that raised a red flag.

One such transcript they looked at was a conference call with Erin Callan, the former Lehman Brothers CFO, just months before the firm’s collapse. In it, she used the word “great” 14 times, “strong” 24 times and “incredibly” eight times to describe the bank’s recent performance. She used the word “challenging” six times and “tough” only once.
Such an overly positive tone as Callan’s is a dead giveaway, the report noted, that a person is being less than candid.

 

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