IR papers: Openness is rewarded
Profit warnings: Will openness be rewarded?
The answer is a qualified ‘yes’, according to researchers at the University of Northern British Columbia (UNBC). ‘It depends a lot on the kind of disclosure included with the warning and how often those warnings are issued,’ says Han Donker, chair of the school of business at UNBC. ‘In general, however, the more information you provide, the better the effect on your stock price.’
Donker and colleague Matthew Church examined earnings warnings by 149 firms listed on Euronext Amsterdam over two years. They found empirical evidence that more disclosure has an especially positive impact on the abnormal returns of firms with multiple successive earnings warnings. They also report that blaming ‘market conditions’ for the warning is likely to have little influence mitigating any negative share-price impact.
‘Market conditions are generally already well understood by investors and analysts, so reiterating them in the profit warning doesn’t help much,’ comments Church. ‘What does seem to help is talking about solutions. The short, one-line statement some companies give with their profit warning may end up doing more harm than good.’
The French hedge
Do investors really value the use of derivatives? Empirical evidence from France says non. When scrutinized under the pressure of a linear regression framework combined with a relentless bombardment of panel data techniques, a sample of 250 derivatives-using non-financial firms exhibited no significant valuation effect. The French apparently assign zero premium to using derivatives.
‘The findings imply managers should explain to investors that firms use derivatives for hedging purposes and how such a financial policy creates shareholder value,’ writes Karim Ben Khediri, assistant professor of finance at Université Paris Ouest Nanterre La Défense, in a recent edition of the Journal of Risk Finance.
Having said that...
Linguists are also avid observers of quarterly earnings announcements. Belinda Crawford Camiciottoli, an English language researcher at the University of Florence, has been analyzing the differences between the conference call and press release version of earnings disclosures, focusing on discourse connectives – words or phrases like ‘however’, ‘as a result’ or ‘moreover’ – that show relationship within a conversation or text. In one experiment, she collected the earnings releases and matching oral presentations of 30 major multinationals and found the oral versions had many more discourse connectives.
‘Usually, those are more prevalent in written prose,’ notes Crawford Camiciottoli. Analysts, she adds, are equally skillful at using certain forms of language – for example, phrasing indirect requests such as ‘Just wondering if you could shed more light on....’ – to reach their own goals.
In a forthcoming paper in the Journal of Pragmatics, Crawford Camiciottoli writes, ‘Analysis suggests the motivation behind this usage does not reflect a particular concern for politeness, but rather the analysts’ aim to extract as much information as possible, while projecting an image of highly competent yet likeable professionals.’