IR Papers: Cost of cutting (up)

Jun 18, 2012
<p>A roundup of academic research from the world of IR studies</p>

Companies with better segment disclosure enjoy lower cost of equity capital, say Spanish researchers. When they sampled SFAS 131 reporting firms from 2001 to 2006 they found better segment data predicted better analyst forecast accuracy and reduced industry sector return covariance assessments. Improving information precision, they note, cuts estimation risk.

‘In these circumstances, investors will be more willing to lend capital to the firm offering lower returns,’ says Belén Blanco, assistant professor of business administration at the Universidad de Navarra. So if improved segment disclosure leads to cheaper money, how come every company doesn’t mince the numbers?

‘They may be concerned about revealing competitive information,’ offers Blanco. ‘There is also litigation risk and preparation costs.’

Embrace the sell side

Is it worth devoting management time to sell-side analysts? Some investors say they would rather it was spent with them, and management often regards such meetings as a necessary evil. But new research accentuates the positive.

‘You don’t want to alienate the people covering your firm,’ notes study author Eugene Soltes, assistant professor of business administration at Harvard Business School. ‘So you meet with analysts because of the potential ramifications of not doing so.’

Perhaps the most important benefit is increased access to potential new investors. ‘The people you meet with more often are also arranging meetings with those investors,’ says Soltes. ‘It’s a derived benefit, but it helps enlarge your pool of investors.’

World o’ research mini-quiz!

Q: Do corporate managers put their money where their mouths are?
A: Evidence from trading patterns after conference calls suggests not. Researchers at Lehigh University, using textual analysis of 2,880 conference call transcripts from 2004 to 2007, find positive tones predict net insider selling, and negative emotive tones predict buying. The strongest inverse tone/trading patterns emerge for CEOs of smaller firms.  

Q: Does governance affect earnings management at Palestine Exchange-listed companies?
A: Comparing various governance characteristics against a measure of earnings management, investigators at Birzeit University find only board independence shows a consistent association. Curiously, the link is positive. Pointing to previous research, study authors suggest that even where formally unconnected, ‘board members may have implicit ties to the controlling family’ and thus may not be truly independent.  

Q: Is religion good or bad (for the economy)?
A: Companies based in more religious US counties enjoy cheaper equity financing, according to a Canadian/US team of investigators. They conclude that religion – particularly mainstream Protestantism – assists economic development.

How many did you get right?
3: You read the same academic journals I do.
1-2: ‘Cute’ only gets you so far.
0: They’re hiring in Indonesia.

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