IR Papers: Negative thoughts

Jun 05, 2013
<p>A roundup of academic research from the world of IR studies</p>

Trying to hide bad news? Only letting bullish analysts participate in earnings call Q&As? Researchers at Harvard and the London School of Economics say they know what you’re up to – and can even make money on your tendency to play favorites.

The scholars say companies that disproportionately call on favorable analysts tend to underperform in the future with more negative earnings surprises and restatements. ‘Our key finding is that firms that manipulate their conference calls in this way appear to be hiding bad news, which ultimately leaks out in the future,’ notes the research, adding that an investor with this knowledge could achieve abnormal returns of up to 95 basis points per month.

The study also points out that it is not costless for companies to manipulate their calls: serial call choreographers witness significant future drops in analyst coverage.

Not taking over

Adopting anti-takeover provisions boosts shareholder value by about 3 percent, according to a New York University study. The research contrasts with the widely held notion that takeover defenses destroy shareholder value.

Stern School of Business PhD candidate Erin Smith says it is important to consider the regulatory context. ‘My sample is drawn from an environment in which institutional investors have acquired an unprecedented level of control over the board,’ she writes. ‘As a result, it is perhaps not surprising that my findings suggest provisions that shift authority back to the board are met with positive market reactions.’

Idle boasts

What factor most affects a firm’s tendency to lie when reporting financials? You might think a lack of governance oversight. According to a Canadian research team, however, C-suite hubris dominates when it comes to the likelihood of financial misreporting.

Investigators find firms with an active M&A strategy, complex structures, top-rated CEOs, market-darling status and favorable media coverage are most likely to engage in financial reporting or disclosure fraud, regardless of any visible signs of good governance.

Holy distracting

Do angels distract investors? No one knows for sure. But a team of scientists at the University of South Florida has published an eponymous report showing that investors pay less attention to financial news during Easter week. The effect is strongest at companies with headquarters in less religious areas.

The paper’s authors write: ‘The distraction effect of religious holidays is less pronounced among people who attend church regularly... Religious holidays can be more distracting in less religious areas because religion, religious participation and planning for vacation and/or family gatherings that otherwise play a smaller role in daily routine can take a prominent role during Easter week.’

World o’ research

  • The more voluntary disclosure, the more foreign institutional investment, according to a Turkish analysis published in the Journal of Emerging Market Finance.
  • A University of Bahrain survey shows 26 percent of the top 40 Bahrain Stock Exchange companies devote a separate section to IR information on their websites.
  • A study of 67 Bovespa companies finds good corporate governance – particularly the elements of transparency and disclosure – significantly affects cost of capital.
  • Sampling companies from 53 countries between 1981 and 2010, a Chinese-Australian research team documents a strong association between liquidity and company value, particularly in markets that have transparent financial reporting and robust investor protection.
  • An analysis of firms in four European countries finds cost of capital declines when companies provide hard, quantitative customer value disclosure. Imprecise, qualitative pap is worthless.
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