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Deceit pays dividends: How CEO lies can boost stock ratings and fool even respected financial analysts
Financial analysts have a gullibility problem − and the better their reputation, the worse it is.
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The multibillion-dollar collapse of FTX – the high-profile cryptocurrency exchange whose founder now awaits trial on fraud charges – serves as a stark reminder of the perils of deception in the financial world.
The lies from FTX founder Sam Bankman-Fried date back to the company’s very beginning, prosecutors say. He lied to customers and investors alike, it is claimed, as part of what U.S. Attorney Damian Williams has called “one of the biggest financial frauds in American history.”
How were so many people apparently fooled?
A new study in the Strategic Management Journal sheds some light on the issue. In it, my colleagues and I found that even professional financial analysts fall for CEO lies – and that the best-respected analysts might be the most gullible.
Financial analysts give expert advice to help companies and investors make money. They predict how much a company will earn and suggest whether to buy or sell its stock. By guiding money into good investments, they help not just individual businesses but the entire economy grow.
But while financial analysts are paid for their advice, they aren’t oracles. As a management professor, I wondered how often they get duped by lying executives – so my colleagues and I used machine learning to find out. We developed an algorithm, trained on S&P 1500 earnings call transcripts from 2008 to 2016, that can reliably detect deception 84% of the time. Specifically, the algorithm identifies distinct linguistic patterns that occur when an individual is lying.
Our results were striking. We found that analysts were far more likely to give “buy” or “strong buy” recommendations after listening to deceptive CEOs – by nearly 28 percentage points, on average – rather than their more honest counterparts.
We also found that highly esteemed analysts fell for CEO lies more often than their lesser-known counterparts did. In fact, those named “all-star” analysts by trade publisher Institutional Investor were 5.3 percentage points more likely to upgrade habitually dishonest CEOs than their less-celebrated counterparts.
Although we applied this technology to gain insight into this corner of finance for an academic study, its broader use raises a number of challenging ethical questions around using AI to measure psychological constructs.
Biased toward believing
It seems counterintuitive: Why would professional givers of financial advice consistently fall for lying executives? And why would the most reputable advisers seem to have the worst results?
These findings reflect the natural human tendency to assume that others are being honest – what’s known as the “truth bias.” Thanks to this habit of mind, analysts are just as susceptible to lies as anyone else.
What’s more, we found that elevated status fosters a stronger truth bias. First, “all-star” analysts often gain a sense of overconfidence and entitlement as they rise in prestige. They start to believe they’re less likely to be deceived, leading them to take CEOs at face value. Second, these analysts tend to have closer relationships with CEOs, which studies show can increase the truth bias. This makes them even more prone to deception.
Given this vulnerability, businesses may want to reevaluate the credibility of “all-star” designations. Our research also underscores the importance of accountability in governance and the need for strong institutional systems to counter individual biases.
An AI ‘lie detector’?
The tool we developed for this study could have applications well beyond the world of business. We validated the algorithm using fraudulent transcripts, retracted articles in medical journals and deceptive YouTube videos. It could easily be deployed in different contexts.
It’s important to note that the tool doesn’t directly measure deception; it identifies language patterns associated with lying. This means that even though it’s highly accurate, it’s susceptible to both false positives and negatives – and false allegations of dishonesty in particular could have devastating consequences.
What’s more, tools like this struggle to distinguish socially beneficial “white lies” – which foster a sense of community and emotional well-being – from more serious lies. Flagging all deceptions indiscriminately could disrupt complex social dynamics, leading to unintended consequences.
These issues would need to be addressed before this type of technology is adopted widely. But that future is closer than many might realize: Companies in fields such as investing, security and insurance are already starting to use it.
Big questions remain
The widespread use of AI to catch lies would have profound social implications – most notably, by making it harder for the powerful to lie without consequence.
That might sound like an unambiguously good thing. But while the technology offers undeniable advantages, such as early detection of threats or fraud, it could also usher in a perilous transparency culture. In such a world, thoughts and emotions could become subject to measurement and judgment, eroding the sanctuary of mental privacy.
This study also raises ethical questions about using AI to measure psychological characteristics, particularly where privacy and consent are concerned. Unlike traditional deception research, which relies on human subjects who consent to be studied, this AI model operates covertly, detecting nuanced linguistic patterns without a speaker’s knowledge.
The implications are staggering. For instance, in this study, we developed a second machine learning model to gauge the level of suspicion in a speaker’s tone. Imagine a world where social scientists can create tools to assess any facet of your psychology, applying them without your consent. Not too appealing, is it?
As we enter a new era of AI, advanced psychometric tools offer both promise and peril. These technologies could revolutionize business by providing unprecedented insights into human psychology. They could also violate people’s rights and destabilize society in surprising and disturbing ways. The decisions we make today – about ethics, oversight and responsible use – will set the course for years to come.
Steven J. Hyde owes shares in Prodigy Intelligence, which develops AI psychometrics company.
cryptocurrency
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One city held a mass passport-getting event
A New Orleans congressman organized a way for people to apply for their passports en masse.
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While the number of Americans who do not have a passport has dropped steadily from more than 80% in 1990 to just over 50% now, a lack of knowledge around passport requirements still keeps a significant portion of the population away from international travel.
Over the four years that passed since the start of covid-19, passport offices have also been dealing with significant backlog due to the high numbers of people who were looking to get a passport post-pandemic.
Related: Here is why it is (still) taking forever to get a passport
To deal with these concurrent issues, the U.S. State Department recently held a mass passport-getting event in the city of New Orleans. Called the "Passport Acceptance Event," the gathering was held at a local auditorium and invited residents of Louisiana’s 2nd Congressional District to complete a passport application on-site with the help of staff and government workers.
'Come apply for your passport, no appointment is required'
"Hey #LA02," Rep. Troy A. Carter Sr. (D-LA), whose office co-hosted the event alongside the city of New Orleans, wrote to his followers on Instagram (META) . "My office is providing passport services at our #PassportAcceptance event. Come apply for your passport, no appointment is required."
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The event was held on March 14 from 10 a.m. to 1 p.m. While it was designed for those who are already eligible for U.S. citizenship rather than as a way to help non-citizens with immigration questions, it helped those completing the application for the first time fill out forms and make sure they have the photographs and identity documents they need. The passport offices in New Orleans where one would normally have to bring already-completed forms have also been dealing with lines and would require one to book spots weeks in advance.
These are the countries with the highest-ranking passports in 2024
According to Carter Sr.'s communications team, those who submitted their passport application at the event also received expedited processing of two to three weeks (according to the State Department's website, times for regular processing are currently six to eight weeks).
While Carter Sr.'s office has not released the numbers of people who applied for a passport on March 14, photos from the event show that many took advantage of the opportunity to apply for a passport in a group setting and get expedited processing.
Every couple of months, a new ranking agency puts together a list of the most and least powerful passports in the world based on factors such as visa-free travel and opportunities for cross-border business.
In January, global citizenship and financial advisory firm Arton Capital identified United Arab Emirates as having the most powerful passport in 2024. While the United States topped the list of one such ranking in 2014, worsening relations with a number of countries as well as stricter immigration rules even as other countries have taken strides to create opportunities for investors and digital nomads caused the American passport to slip in recent years.
A UAE passport grants holders visa-free or visa-on-arrival access to 180 of the world’s 198 countries (this calculation includes disputed territories such as Kosovo and Western Sahara) while Americans currently have the same access to 151 countries.
stocks pandemic covid-19 grantsUncategorized
Fast-food chain closes restaurants after Chapter 11 bankruptcy
Several major fast-food chains recently have struggled to keep restaurants open.
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Competition in the fast-food space has been brutal as operators deal with inflation, consumers who are worried about the economy and their jobs and, in recent months, the falling cost of eating at home.
Add in that many fast-food chains took on more debt during the covid pandemic and that labor costs are rising, and you have a perfect storm of problems.
It's a situation where Restaurant Brands International (QSR) has suffered as much as any company.
Related: Wendy's menu drops a fan favorite item, adds something new
Three major Burger King franchise operators filed for bankruptcy in 2023, and the chain saw hundreds of stores close. It also saw multiple Popeyes franchisees move into bankruptcy, with dozens of locations closing.
RBI also stepped in and purchased one of its key franchisees.
"Carrols is the largest Burger King franchisee in the United States today, operating 1,022 Burger King restaurants in 23 states that generated approximately $1.8 billion of system sales during the 12 months ended Sept. 30, 2023," RBI said in a news release. Carrols also owns and operates 60 Popeyes restaurants in six states."
The multichain company made the move after two of its large franchisees, Premier Kings and Meridian, saw multiple locations not purchased when they reached auction after Chapter 11 bankruptcy filings. In that case, RBI bought select locations but allowed others to close.
Image source: Chen Jianli/Xinhua via Getty
Another fast-food chain faces bankruptcy problems
Bojangles may not be as big a name as Burger King or Popeye's, but it's a popular chain with more than 800 restaurants in eight states.
"Bojangles is a Carolina-born restaurant chain specializing in craveable Southern chicken, biscuits and tea made fresh daily from real recipes, and with a friendly smile," the chain says on its website. "Founded in 1977 as a single location in Charlotte, our beloved brand continues to grow nationwide."
Like RBI, Bojangles uses a franchise model, which makes it dependent on the financial health of its operators. The company ultimately saw all its Maryland locations close due to the financial situation of one of its franchisees.
Unlike. RBI, Bojangles is not public — it was taken private by Durational Capital Management LP and Jordan Co. in 2018 — which means the company does not disclose its financial information to the public.
That makes it hard to know whether overall softness for the brand contributed to the chain seeing its five Maryland locations after a Chapter 11 bankruptcy filing.
Bojangles has a messy bankruptcy situation
Even though the locations still appear on the Bojangles website, they have been shuttered since late 2023. The locations were operated by Salim Kakakhail and Yavir Akbar Durranni. The partners operated under a variety of LLCs, including ABS Network, according to local news channel WUSA9.
The station reported that the owners face a state investigation over complaints of wage theft and fraudulent W2s. In November Durranni and ABS Network filed for bankruptcy in New Jersey, WUSA9 reported.
"Not only do former employees say these men owe them money, WUSA9 learned the former owners owe the state, too, and have over $69,000 in back property taxes."
Former employees also say that the restaurant would regularly purchase fried chicken from Popeyes and Safeway when it ran out in their stores, the station reported.
Bojangles sent the station a comment on the situation.
"The franchisee is no longer in the Bojangles system," the company said. "However, it is important to note in your coverage that franchisees are independent business owners who are licensed to operate a brand but have autonomy over many aspects of their business, including hiring employees and payroll responsibilities."
Kakakhail and Durranni did not respond to multiple requests for comment from WUSA9.
bankruptcy pandemicUncategorized
Industrial Production Increased 0.1% in February
From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 p…
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Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 percent. Both gains partly reflected recoveries from weather-related declines in January. The index for utilities fell 7.5 percent in February because of warmer-than-typical temperatures. At 102.3 percent of its 2017 average, total industrial production in February was 0.2 percent below its year-earlier level. Capacity utilization for the industrial sector remained at 78.3 percent in February, a rate that is 1.3 percentage points below its long-run (1972–2023) average.Click on graph for larger image.
emphasis added
This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).
Capacity utilization at 78.3% is 1.3% below the average from 1972 to 2022. This was below consensus expectations.
Note: y-axis doesn't start at zero to better show the change.
The second graph shows industrial production since 1967.Industrial production increased to 102.3. This is above the pre-pandemic level.
Industrial production was above consensus expectations.
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