IR Papers: How war affects valuation

Mar 02, 2011
<p>A roundup of academic research from the world of IR studies</p>

Are local armed insurgencies affecting your company’s stock price? Don’t bother communicating intellectual capital to investors in visual or numerical formats.

Instead, focus on your narrative and hope for a ceasefire. An analysis of Sri Lankan firms reveals investors ignore all three forms of intellectual capital disclosure during a period of civil war but do respond to voluntary narrative disclosure when there’s a temporary ceasefire.

‘Intellectual capital disclosure informs about the future earnings capabilities of resources not disclosed in financial statements,’ notes study author Indra Abeysekera, associate professor in accounting at the University of Wollongong in Australia. ‘In times of political instability, investors remain aware of those resources but ignore them when it comes to calculating a company’s market value.’

Analyzing the stock price and annual reports of 90 companies listed on the Colombo Stock Exchange, Abeysekera’s data show that during the temporary truce period (2001-2005) of Sri Lanka’s civil war, only narrative disclosure had any effect on market value. ‘Investors usually respond to a mix of disclosure formats,’ he says. ‘In this case, investors were optimistic – but only up to a point. A narrative was the only format they trusted.’

Pointing to recent events in Arab nations, Abeysekera concludes: ‘Managers must understand that, in particularly unstable situations, they should emphasize narrative information about forward-looking intellectual capital. People tend to believe good stories but are more skeptical when it comes to numerical models or ‘glamorous’ images.’

Parenting problems
Communicating corporate parent brand heritage does nothing for a spin-off’s stock valuation, according to a recent study. Researchers examining US data during 1992–2004 found spin-offs failed to outperform the market one year after divestiture; moreover, those relying on the parent’s name, slogan, tagline or other brand reference did about as well as those that did not.

‘I expected investors might behave like consumers who typically transfer the value, respect and other associations they have about a familiar brand to its product extension,’ says study co-author Subodh Bhat, professor of marketing at San Francisco State University. ‘Instead, it seems investors evaluate stocks based on different criteria. Using a parent’s brand equity to transition to a new identity saves on marketing and branding expenditures but it won’t boost stock valuation.’

World o’ research

  • Swedish managers increasingly focus on non-financial information in their annual reports, according to a survey of IROs at the country’s largest companies. The report also reveals a trend shift from R&D and relational data toward CSR, employee-related information and more non-financial key performance indicators.
  • Researchers at the University of Illinois say disaggregating management forecasts can reduce investors’ fixation on earnings. The study’s authors suggest disaggregation into earnings and its components can provide an alternative to stopping earnings guidance.
  • The number of shareholder proposals a firm receives is positively related to subsequent earnings management, according to a US study.
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