January, 31 2024

AI is reshaping financial forecasts and disclosure–and making language more important than ever

Gone are the days of relying entirely on traditional financial metrics as AI transforms how forecasters rate and dissect financial health of companies.

Do CEOs understand how AI captures their words…or is it lost in translation?

Learn how market analysis at AI warp speed is monitoring and evaluating news, financial forums and social media, and the new risks fit raises for CEOs as predictors capture understanding into perceptions and timely sentiments surrounding a company.

Artificial Intelligence (AI) is at the forefront of everyone’s thoughts. The number of AI mentions on earnings calls has skyrocketed, according to Accenture’s new Technology Vision 2024 report. In Q1 2022, there were approximately 500 mentions. By Q3 2023, there were more than 30,000. But AI is transforming earning calls in many other ways.

Gone are the days of relying entirely on traditional financial metrics as AI transforms how forecasters rate and dissect the financial health of companies. At the heart of this transformation is machine learning (ML), a powerful tool that enables  crunching vast data sets to detect and establish meaningful patterns. ML algorithms analyze historical financial data, market trends and economic indicators at astonishing speed and accuracy, identifying insights that elude traditional analytics and suggest a more nuanced understanding of an industry or a business’s  performance. Predictive analytics (PA), a subset of machine learning, leverages historical data to forecast future financial trends, enabling informed assumptions assessing revenue projections, market share or risks.

Natural language processing (NLP) is another critical tool, reshaping how analysts hunt for indications about market activity by sifting through vast amounts of text–reports, filings, news stories, transcripts of audio and video clips, and social media posts. Meanwhile, sentiment analysis (SA) gauges the mood of market participants by analyzing positive or negative patterns in commentary, which could influence equity pricing.

The ludicrous speed of market analysis raises new risks

By monitoring and evaluating news, financial forums, and social media, predictors capture understanding into perceptions and timely sentiments surrounding a  company.

Consider the implications this will have in the age of algorithmic trading (AT), a trodden strategy for large institutions now supercharged by AI and ML, which analyze statistics and execute trades at ludicrous speeds unattainable by humans.

These algorithms respond to fluctuations in real time, integrating AI to optimize trading strategies and maximize returns. It underscores  the importance of savvy communications and the role leaders will play in evolving commentary and public opinion in a volatile financial arena.

Do CEOs speak AI’s language–or is it lost in translation?

AI algorithms dive deep into every financial and market nuance, requiring companies to present crystal clear, comprehensive, and unambiguous reports. As NLP and SA decode market vibes, C-suites must fully grasp the nuances of language in all public communications and filings. They must be in line with market expectations–or thoroughly explain any discrepancies.

For example, during a CNBC interview last week, PayPal’s new CEO, Alex Chriss, pledged to “shock the world” with innovations. Investors grappled with Chriss’s bold comment, which caused confusion as it contradicted the company’s slow innovation reputation. Some analysts saw PayPal’s Jan. 25 announcement as incremental rather than revolutionary, causing the downgrade.

Eyes and ears will be fixed on PayPal’s Feb. 7 earnings to scrutinize the validity or hollowness of Chriss’s assertions carrying possible ramifications. The distinct factor in this situation lies in the instant intense market reaction triggered by AS assessments.

CEOs influencing equity value with hasty statements is not new. Dennis Muilenburg, the former Boeing CEO handling the 737 Max crisis in 2019, and Elon Musk, with his misleading tweet in 2018, considering taking Telsa private both led to stock declines, emphasizing the market’s sensitivity to unclear management communication. Even though language has always been important, AI has supercharged the risks of misusing it.

AI technology requires collaboration to craft cohesive, consistent communication

In most companies, public documents are a collaboration of diverse minds with different expertise and backgrounds, creating a melting pot of writing styles.

Today more than ever, management need a process that guarantees uniform language descriptions and key messages across all public documents. This art is not typically found in the toolkit of lawyers or financial executives, who now must learn new skills and increase their collaboration with seasoned communications wizards.

This meticulous coordination acts as a shield against potential contradictions and discrepancies that vigilant AI systems will uncover instantly. An effective yet straightforward measure of document efficacy serves as a litmus test. Ask an entry level employee to read the document and share two things they remember about it. In other words, what are their immediate takeaways? If their comments do not align with the messages intended, a rewrite is in order to achieve success.

Deepfakes, misinformation, and high-tech hoaxes threaten disclosure

Most companies today have a robust cybersecurity infrastructure to maintain the integrity of financial information. Nevertheless, in the shadows of cyberspace, the very tools wielded to safeguard data can become an arsenal used to stealthily attack system vulnerabilities.

A looming menace for numerous companies is the rise of insidious deepfakes, an ominous frontier that presents grave threats to corporate earnings by potentially manipulating disclosures. Deep fakes are AI-generated media that manipulate audio, video or images. Face-swapping deepfakes replace one person’s face with another. Voice cloning replicates a person’s voice using minimal audio samples. Full-body deep fakes manipulate a person’s entire form, altering actions creating realistic videos.

To thwart these threats thoroughly companies should move just beyond understanding of these deceptive attacks. Deploying swift, well-rehearsed communication plans is essential to respond.

Companies must also engage with stakeholders in an ongoing, proactive effort to shape the narrative around performance and prevent misinterpretations that might arise from AI-generated analysis.

Finally, in this year of AI and continually shifting market dynamics, companies must embrace adaptability as the name of the game.

Taking a proactive stance will not only strengthen the company against heightened scrutiny but also position it to thrive and be resilient amid global market volatility.

Richard Torrenzano is CEO of The Torrenzano Group, which helps organizations take control of how they are perceived. For nearly a decade, he was a member of the New York Stock Exchange Management (policy) and Executive (operations) Committees. He is a sought after expert and leading commentator on AI and cyber-attacks, brands, crisis, media, financial markets, and reputation.

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