INFORMED
LISTENERS PAY
ATTENTION TO
WHAT ANALYSTS
ARE ASKING
It might well be impossible for
management to avoid price
sensitive information coming
out in conference calls. The issue
grabbed headlines last year when
the leadership of Aspen learned
that who you invite to join and what
you say can have big consequences.
The pharmaceutical giant faced a
complaint to the JSE by a maligned
minority shareholder who was not
invited to join a conference call at
which he claimed price sensitive
information had been discussed.
The share price fell by 6% on the
day of the call.
The JSE didn’t find that Aspen had
flouted the rules, but it can still
learn from the experience. One
lesson is to always disclose price
senstitive information ahead of the
call. The other is to ensure everyone
is invited. But what if you can “read”
the tone of managers to get signals
on whether you should buy or sell
the company’s shares? There seems
to be no way that companies can
disclose that sort of information
in advance.
They place
more weight
on the tone
of analysts’
questions than
on the tone
of managers’
answers.
54
ISSUE 4 – JULY 2015
Two finance professors, Paul
Brockman and Xu Li, delve into this
question in a recent edition of the
Financial Analysts Journal. The key
issue is not so much the prepared
part of announcements, but the
question and answer sessions that
are usually held. Prepared parts
are usually kept to script based on
whatever information is released
in advance of the calls. Previous
research revealed that managers
manipulate the Q&A sessions by
calling on investors to ask questions
they know are friendly, while doing
their best to avoid questions they
know will be aggressive. But the
researchers find that managers
aren’t very successful in this. They
analysed thousands of transcripts
of calls and find that on average, in
the Q&A sessions, managers were
much less optimistic than in the
prepared sections. They did that
by classifying all the words in the
transcripts as positive or negative. I
don’t know quite how they classified
words, but I imagine words like
“great” or “bumper” have a positive
tone, but words like “cautious” or
“conservative” are negative.
But what effect does that have on
stock prices? The tone of managers
has a small effect. If they manage
to stay positive during the Q&A
sessions, prices tend to appreciate
a bit. But what is interesting is that
a far bigger effect was detected
from the tone of the analysts, who
are usually working for big broking
firms, who are asking questions.
Asking very aggressive negative
questions tends to have a bigger
impact on share prices. This isn’t
down to the negative analysts
themselves selling, but rather the
institutional investors who are
listening into the call selling. They
place more weight on the tone of
analysts’ questions than on the tone
of managers’ answers.
The trouble for ordinary retail
investors is that detecting the
tone of the call is not that easy.
Sophisticated institutional investors
are much more in tune with
the questions being asked. For
example, an investor who has
calculated projected margins down
to a matter of basis points can
detect tone in a question about
margins more easily than someone
who hasn’t. They also tend to have
personal knowledge of the analysts
they are listening to because they
are often clients of those brokers,
so they are even better at detecting
tone. So, like so much else in
investing, we should expect the
large institutional investors to have
more of a systematic advantage
than the little guy.
But what is company management
to do? In part the answer reveals
just how contorted the whole notion
of proper disclosure and price
sensitivity is. What is price sensitive
in the eyes of a sophisticated
investor is invisible to someone not
so in tune. But moreover, it is the
questions analysts ask that have a
bigger impact than management’s
answers. That means a lot of the
price sensitivity is simply beyond
management’s control. Obviously,
managers can’t know what
questions will be asked in advance
so there is no way of ensuring full
disclosure of those questions. Calls
are usually recorded and made
available some time after, but by
the time anyone has got round to
listening, prices will have moved.
This sort of research lends support
to the idea that active institutional
investors serve a very important
function in financial markets by
keeping prices “efficient”. Their
research positions them to know
how to interpret information much
faster than the rest of us. The rest
of us can try and put in the research
effort, or we can just ride on the
back of that knowledge by investing
in passive investment vehicles such
as exchange-traded funds.
It certainly seems a much better
option than straining to
hear every last word said on a
conference call. ■