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Investors don’t buy “big baths” when CEOs use deceptive language, Rotman study shows

June 12, 2018

Toronto – If a CEO explains a series of large write-offs using lots of words and phrases like “you folks know,” “bang-up,” “amazing” and “in truth,” they may not be telling it themselves.

Investors are on to this. New research shows that investor behaviour reflects a credibility gap in the information they have versus the firm following “big bath” earnings reports that use deceptive language. Market activity drops following such reports, compared to what happens after big bath reports that don’t feature lots of weasel words and phrases, the study from the University of Toronto’s Rotman School of Management found.

Companies take a “big bath” when they choose to make significant write-offs and write-downs on items such as the value of assets, restructuring charges or other costs, usually in an earnings period that is already poor.  The practice is a popular way to make future positive earnings appear even better when compared with the previous low values.

While big baths can be used legitimately to align accounting with what is actually happening in a company, they can also be misused as a way to make a CEO look good and secure bonuses in a subsequent earnings period.

The study “is a way to distinguish management incentives when a big bath occurs,” says Jingjing Wang, a Rotman PhD student who conducted the research with Prof. Ole-Kristian Hope who is the Deloitte Professor of Accounting at the Rotman School.

The researchers assessed the truthfulness of CEOs by comparing the language they used in earnings conference calls against a list of words and phrases previously developed by researchers as indicators of executive deception.  Some investors already use similar techniques. The most frequently used deceptive words or phrases were either those assuming common knowledge (e.g. “shareholders would agree”) or that were extremely positive (e.g. tremendous, unbelievable).

The researchers then looked at subsequent market responses following those calls. Stock liquidity dropped by 9 percent among big bath firms when CEOs were found to be deceptive in their remarks, compared to firms where CEOs were seen as more truthful. The effect was even more pronounced when CEOs found to be truthful in one year were later found to be deceptive in a subsequent year.

The study is forthcoming in Accounting, Organizations and Society and is online at,

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Ken McGuffin
Manager, Media Relations
Rotman School of Management
University of Toronto
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