Verba volant, transcripta manent: what corporate earnings calls reveal about the AI stock rally (European Central Bank)

Summary

• Firms' generative AI (GenAI) exposure surged after ChatGPT's release in late 2022, quadrupling in the IT sector from 1.3% in 2022 to 5% in 2023.p.15
• A 1 percentage point increase in GenAI exposure leads to a 0.26% rise in quarterly excess stock returns for early exposed firms.p.2
• Difference-in-Differences estimates show early exposed firms saw 2.4% average quarterly stock price increases relative to laggards after ChatGPT's release.p.2
• In the Communication Services sector, GenAI exposure rose from 0.9% in 2022 to 3% in 2023.p.17
• For every 1 percentage point increase in adoption or opportunity-related exposure, early exposed firms outperformed laggards by 0.63% and 0.45% in quarterly excess returns, respectively.p.6
• Firm-specific fixed effects account for 15.3% of the variation in GenAI exposure, making firm-level differences a main source of variation.p.18

Key insights

1. Zero-shot classification using BART-large-MNLI and prompt engineering with GPT-4o effectively measure firm-level technology exposure and sentiment in earnings call transcripts without manual labels.p.9
2. Discussions of GenAI adoption have a stronger positive impact on market valuation than discussions framed around opportunity alone.p.6
3. Stock market gains for early exposed firms were primarily driven by investor sentiment rather than immediate upward revisions in earnings expectations.p.6
4. Sectoral heterogeneity is significant, with Information Technology, Communication Services, and Consumer Discretionary firms demonstrating the strongest post-ChatGPT exposure increases.p.17
5. Post-ChatGPT, discussions regarding GenAI risk showed a positive correlation with stock price returns, likely because risk topics are addressed as part of holistic corporate execution strategies in Q&A sessions.p.20
6. Sustained engagement alongside early adoption of GenAI technology provides a distinct and persistent advantage in stock market valuations.p.6