“How To Win Investors Over” by Baruch Lev is a 2011 journal article that discusses how to
properly engage with Wall Street and to interact with shareholders in publicly traded companies.
influence investors when they are swayed by information and distracting for managers. Lev states that managerial relationships with investors has broken down – citing, for example in the beginning of the article, the criticism levied by such prominent actors such as as Warren Buffet, the CFA institute and the U.S. Chamber of Commerce against providing earnings guidance.
The article mainly revolves around a discussion of earnings guidance, but it also includes a section on how investors think, stating that research shows (in sum) that investors are somewhere between “naïve and all knowing” and are willing to do their research if it is available. This is where earnings guidance comes in. Earnings guidance, or “publicly releasing managerial forecasts of a company’s profits”, is one way in which investors can make informed decisions about the health of the company and the actions of the managerial staff. Lev states that his academic research actually refutes much of this criticism.
Lev does not stop there, he also states that managers issuing earnings guidance should be as smart as possible in doing so. Thus, he sets out some guidelines for the “guiders”: “Guide investors only if you are a better predictor of earnings or sales than analysts are”, strongly consider providing guidance if other companies in your sector do so, include guidance about the main drivers of income, and avoid loosing credibility by providing less than exemplarily and accurate advice. He concludes by offering a similar “guidance for guiders” in respect to pro forma earnings (similarly disregarded by economic actors). By following these typically disregarded routes, managers foster better relationships with their investors who will be better informed (in line with the latest academic research).
“Four Messages for Taking Your Message to Wall Street” is a 2001 article written by Amy Hutton that addresses the issue of providing misinformation (deliberately or not) to Wall Street Investors and the consequential negative affects. She cites the example of Tyco International who was subject to a report which claimed that Tyco International had misrepresented their profitability. In response, it took two months for its stock to fall 50%. However, this misrepresentation was not as it seemed – Tyco had not “taken enough care” to make it easy for investors to analyse their profitability results. As such, it is crucial for managerial staff to ensure accurate and easy to access information for the stock market in order to avoid a Tyco situation. Hutton offers four rules for companies to consider.
The first is “make sure your accounting methods reflect your strategy” or in other words “make sure your official results reflect as closely as possible what you did to achieve them”. As the financial markets primarily care about consistency between accounting choices and current strategy because analysts can see the market changing on their own but are interested in the potential response of the managerial staff of the company concerned. The second rule is to “popularize the nonfinancial metrics that showcase the drivers of your strategy”. By doing this and encouraging other companies to take up your methods it can make the metric that most favors its results the most respected one – this has obvious advantages to a company trying to get the best stock performance.
The third rule is to “appoint top managers who have credibility in executing your strategy”. If you hire the best managers the company will in the best position to respond to market changes – an important quality in a stock that would perform. The final rule is to “make sure your forecasts reach the right people in the right way”. By communicating directly to analysts and institutional investors they can provide the best possible valuations that will trickle down to standard investors that rely on them. By following these four rules, a manager can avoid the pitfalls of Tyco and get the best possible message regarding the value of your company to investors.
“Communicating strategy to financial analysts” is a 2002 article written by Jerome Kuperman. It was written to stress the importance of sell-side financial analysts. These analysts are important because they affect both investor behavior and the firm’s reputation in the business community. To get the most out of a company’s relationship with sell side financial analysts Kuperman states that effective communication in key. He sets out a few guidelines for managers to follow in order to achieve this effectiveness.
The first is for managers to create and focus communication content by providing quantitative and qualitative data, and a coherent rationale behind a company’s strategy. If a company provides a specific strategic rationale for a decision that Kperman details, then its legitimacy will be significantly increased in the eyes of these analysts. Secondly, an effective delivery of information relies on utilizing the right representatives. If a company representative or manager is not comfortable with the relevant information, confidence will be undermined. As well as this, the right analysts should be selected to receive the right information rather than a catch-all strategy or else the information a company is trying to present may get drowned out or misrepresented. Finally, the relationship must be managed correctly. Trust and credibility must be built up and the correct resources exploited in order to have the best personal relationship with the correct sell-side financial analysts.
