IR Papers: ‘Predictable earnings’ create volatility

Oct 31, 2011
<p>A roundup of academic research from the world of IR studies</p>

Companies that attempt to achieve ‘predictable earnings’ may be shooting themselves in the foot.

A study examining the link between analyst forecast accuracy and a firm’s shareholder composition shows such companies appeal mainly to short-term-oriented institutional investors, and experience corresponding volatility.

‘Only certain segments of the market act ‘irrationally’ when a firm misses analyst estimates,’ says study co-author Natalia Mintchik, associate professor of accounting at the University of Missouri.

‘Dedicated, long-term investors – the kind a rational company would want to attract – don’t care about forecast accuracy.’  

In fact, says Mintchik, information transparency in the form of more accurate forecasts actually eliminates the ‘dedicated’ investor’s information advantage.

The third type in her investor division methodology – quasi-indexers – appears to reduce ownership as forecast accuracy decreases, but only when earnings exceed forecasts.

‘Lumping together all institutional investors is dangerous,’ warns Mintchik. ‘There are at least three types, with different goals and strategies. You must be clear which type you want to attract.’

In the long term, a company wants long-term investors. ‘But if management is interested only in a high stock price because it wants to cash out its stock options, its perspective may be different,’ Mintchik explains.

‘The question remains whether such perspective serves the shareholders.’

Marketing marketing  

Companies are discovering that one of the best methods for getting their messages to target audiences is by way of blogs and the bloggers who construct them.

The social media release (SMR), which can combine text, video, audio, images, tagging, embedded website links, widgets and social media sharing/comment tools into one document, is rapidly evolving into a powerful communications device.

The problem, according to research, is that many influential bloggers don’t know it exists. Surveying 332 prominent bloggers around the world, investigators at Simon Fraser University find 42 percent have never heard of an SMR.

Bloggers who do use SMRs find them useful and plan to incorporate elements into their blogs more frequently in the future (the poll was conducted in early 2010).

‘The SMR brings a whole new dimension to the press release,’ says study co-author Leyland Pitt, professor of marketing at Simon Fraser, who feels business communicators should pay much more attention to SMRs.

‘If you can make people aware of them and show them how easy they are to use, you will have a far more integrated way of putting a message out to your audience.’

Ownership rules  

Studying 850 firms from 1999 to 2007, Canadian researchers find a strong positive link between employee stock ownership and capital market transparency.

‘Managers have an incentive to keep information opaque when negotiating with unionized employees,’ explains Ole-Kristian Hope, professor of accounting at the University of Toronto.

The more employee equity stakes increase, the more likely firms are to issue management forecasts, have higher quality guidance, provide more conference calls and issue more readable annual reports.

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