When SAP reported earnings that fell short of Wall Street's consensus target by 10 cents per share, the company's stock dropped 6.3% in a single session, wiping out billions of dollars in market capitalisation. Scenes like this play out regularly in financial markets. When Netflix reported a loss of subscribers for the first time in a decade in early 2022, its stock shed more than 35% in a single session. When Meta missed earnings expectations that same year, it recorded what was then the largest single-day market capitalisation loss in US stock market history. The numbers, in each case, told part of the story. 

But new research suggests that the way a CEO communicates, long before results are announced, shapes how sharply investors react when those numbers disappoint or surprise. The question researchers set out to answer was not simply whether earnings beat or missed expectations. The question was whether the language a CEO used in annual letters to shareholders affected how investors interpreted those results. The answer, it turns out, is yes, and the effect is measurable in dollars.

What "regulatory focus" means in plain English

Every leader approaches their role with a motivational orientation. Some are wired to pursue gains: to chase ambitious targets, take calculated risks, and drive towards the best possible outcome. Others are wired to avoid losses: to protect what has been built, manage downside risk, and ensure nothing falls below an acceptable threshold. These two orientations have a name in behavioural science: promotion focus and prevention focus. Think of it as the difference between a CEO who asks "how do we win?" versus one who asks "how do we make sure we don't lose?"

Importantly, both orientations can co-exist in the same person, and neither is inherently better than the other. The research found that investors pick up on these orientations through the language CEOs use in writing to shareholders, and that perception then colours how investors respond when earnings results land.

“What prompted the research was a gap between what scholars already knew about CEOs and what remained unclear about investors, said Dr Dave Sullivan, a Senior Lecturer in the School of Management and Governance at UNSW Business School. “Prior work had shown that a CEO’s motivational orientation can shape strategy, risk-taking and internal organisational behaviour. But far less was known about whether people outside the firm, particularly investors, could detect those motivational cues in CEO communications and use them when judging performance.”

The researchers were interested in a deceptively simple question: when two companies report the same kind of earnings surprise, do investors react differently because they have formed different impressions of the CEO? “In other words, does leadership language become a lens through which financial results are interpreted?” Dr Sullivan asked.

The research behind the finding

The paper, CEO Regulatory Focus as an Interpretive Frame: An Empirical Examination of Investor Perceptions in the Context of Earning Deviations, published in the Academy of Management Journal, was authored by Professor Srikanth Paruchuri of Texas A&M University's Mays Business School, Assistant Professor Joel Andrus of the University of Arkansas’ Sam M. Walton College of Business, and UNSW Business School’s Dr Sullivan.

To test their theory, the researchers analysed data from 521 S&P 500 companies between 2003 and 2017 (a dataset of more than 4000 observations), examining CEO letters to shareholders alongside earnings deviation data and investor reactions measured as cumulative abnormal returns (that is, the gap between how a company's stock actually moved versus how it would have been expected to move based on market conditions). The team also ran two randomised experiments involving more than 800 participants to test the underlying psychological mechanisms driving the effect.

Learn more: How good corporate governance reduces equity volatility

“The central finding was not just that CEO language matters, but that it matters differently depending on the type of earnings surprise,” Dr Sullivan said. “Promotion-focused language did not simply make investors more favourable overall; it amplified the reward when earnings exceeded expectations. Prevention-focused language, by contrast, did not boost the upside in the same way, but it softened the penalty when earnings disappointed.”

Dr Sullivan noted that one of the more striking insights was this asymmetry: investors appeared to align with the CEO’s perceived motivational orientation to the nature of the outcome. “A leader who talks in terms of ambition and gains is given more credit when gains materialise,” he said. “While a leader who talks in terms of vigilance and risk control is given more benefit of the doubt when losses or disappointments occur.”

Promotion-focused CEOs: amplifying the upside

When a CEO used language oriented towards achievement, ambition, and positive outcomes, investors read those signals as evidence of a leader invested in making gains happen. When that company then reported earnings that beat analyst forecasts, investors responded more positively than they did for companies with similar results but less gain-oriented leadership language.

The mechanism the research identified is attribution: in other words, who gets the credit. Investors attributed strong results more directly to a promotion-focused CEO, reasoning that the leader's effort and goal orientation were the driving forces behind the performance. They also expected that the CEO would remain highly engaged going forward, buoyed by the positive outcome. 

"The central finding was not just that CEO language matters, but that it matters differently depending on the type of earnings surprise"

DAVE SULLIVAN

According to the researchers' estimates, for a company with earnings deviations one standard deviation above the mean, promotion-focused language that was one standard deviation higher than average corresponded to an additional $15.6 million in cumulative abnormal returns on a base of $100 million.

The effect did not work symmetrically in reverse. When promotion-focused CEOs reported disappointing results, investors did not punish them significantly more harshly than they punished other CEOs. The researchers' explanation is intuitive: when a gain-seeking CEO falls short, investors reason that external forces, rather than a lack of effort, were responsible; the CEO was trying hard, and circumstances intervened.

Prevention-focused CEOs: Softening the downside

The pattern worked differently (but no less usefully) for CEOs whose language signalled caution, risk management and a focus on avoiding negative outcomes. When those CEOs reported earnings that fell short of analyst targets, investors penalised their companies less severely than they did companies with similar shortfalls led by CEOs whose language lacked that prevention-oriented quality.

Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School

Here again, attribution played a role, but with a distinct logic. Investors reasoned that a CEO who had been working to prevent losses was likely confronting forces beyond their control when results were missed. More significantly, investors perceived that a prevention-focused CEO would be more emotionally activated and engaged by a negative outcome, and thus more motivated to correct course. The estimated effect was considerable; for earnings deviations one standard deviation below the mean, prevention-focused language one standard deviation above the average reduced the investor penalty by $27.6 million on a base penalty of $100 million.

Where the prevention focus did not appear to move the needle was on the upside. When prevention-focused CEOs reported strong earnings, investors did not reward them more generously. The logic is consistent: a CEO focused on avoiding failure does not, in investors' minds, take particular credit for exceeding targets.

What this means for boards, executives and investor relations

The practical implications of this research extend across the boardroom, the executive suite, and the investor relations function. First, and perhaps most directly, the language that appears in annual letters to shareholders is not merely a communication exercise; it is a signal that shapes investor behaviour in measurable, financially material ways. The research demonstrated that the regulatory orientation embedded in a CEO's language remained stable over time for the same CEO, indicating that investors formed consistent impressions and updated their interpretive frameworks accordingly.

For boards evaluating CEO performance and communication strategy, this suggests that shareholder letters warrant scrutiny beyond accuracy and legal compliance. The motivational framing a CEO adopts (whether oriented towards upside pursuit or downside protection) sends signals about leadership character that investors incorporate into their reactions to subsequent financial results.

For investor relations professionals, the research raises a question of alignment: Does the language in the CEO letter match the strategic context in which the company is actually operating? A company in a growth phase may benefit from promotion-oriented leadership language that amplifies investor enthusiasm when results are strong. A company in a restructuring or risk-management phase may benefit from prevention-oriented language that offers investors some cushion when results disappoint.

For executives themselves, the research offers a reminder that investors were, at least in part, evaluating them as people rather than simply as stewards of financial results. As the researchers observed, investors consider CEOs to be "makers of meaning" whose language provides clues about the direction and intensity of their efforts. That perception, formed through the relatively modest medium of an annual letter, ripples forward into how investors process every earnings announcement that follows.

“The broader lesson is that CEO communication should not be treated as decorative language around the ‘real’ numbers,” said Dr Sullivan. “Investors appear to use it as context for deciding what those numbers mean, who deserves credit, who bears responsibility, and how engaged the CEO is likely to be in what happens next.”

“A CEO’s communication, whether through a letter to shareholders or through other channels, is more than a backward-looking summary of performance"

DAVE SULLIVAN

For boards and investor relations teams, he said the implication is not that CEOs should artificially adopt whatever tone seems most useful in the moment. Rather, the safer and more credible recommendation is alignment: the language of leadership should reflect the company’s actual strategic posture, whether that is growth, transformation, recovery or risk containment.

“A CEO’s communication, whether through a letter to shareholders or through other channels, is more than a backward-looking summary of performance. It is part of the market’s memory of the leader. Long before the next earnings surprise arrives, investors may already be forming the frame through which they will interpret the earnings report, which can influence their reactions,” Dr Sullivan concluded.