The Investor - Moneyweb's monthly investment magazine Issue 4 | 页面 54

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. ■