How to Tell When the CEO is Full of It

Trying to catch someone in the act of lying remains far more art than science, but that hasn’t stopped a long line of social psychologists, academics, and magazine editors from trying to boil it down to some universal basics.

David Larcker, a professor of accounting at Stanford University, is the newest entrant into the field of lie detection. With the help of Stanford Ph.D. student Anastasia Zakolyukina, Larcker has just published a study on how to discern when a CEO is lying on an earnings call, based on a close examination of the question-and-answer portion of 16,000 calls whose financial statements – and, in some cases, restatements — were then taken into consideration.

Among the study’s findings? That deceptive CEOs tend not to use first person pronouns as much, using “we” and “our team” rather than “I.” They refer to shareholder value less than their more forthright peers, they’re more hyperbolic, using adjectives like “fantastic” versus “good,” and they don’t “um” and “ahh” as much as truthful CEOs.

“We actually thought there would be more of those ‘ums’ because when you’re lying, you’re telling a story,” says Larcker. “But it turns out that if you know you’re going to be asked a question [about which you need to lie], you have a polished, precise answer.”

The study is far from exacting, says Larcker, who calls his model a “first shot.” (The methodology appears to identify lying CEOs with roughly 5% greater accuracy than a random guess.)

“I’d love to bring more demographics into it, slice it up differently,” he says. “It’d be great to get the input of VCs who are meeting with entrepreneurs all the time and for whom a tool [that helps isolate liars] would be very relevant, given the tremendous amount of uncertainty in funding entrepreneurs.” 

In the meantime, Larcker thinks he may be on to something.

“You have to believe there’s something systematic that gets reflected in words,” Larcker says. “What we’re banking on is that there’s a lot you can control if you are lying cognitively, including your posture and voice. But you run out of cognitive capacity at some point, and maybe it manifests itself in speech. Maybe speech is the setting where these deceptive cues pop out.”