Winning Investors Over. Baruch Lev

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СКАЧАТЬ as it is to U.S. and U.K. executives and investors.¹³ In fact, capital markets are crucial to the investment and growth of public companies in all countries where the majority of corporate ownership is diffused, that is, held by other than founders, governments, or large blockholders. Rene Stulz, in a 2005 study, provides country-by-country data on the mean percentage of shares held by corporate insiders, relative to the remainder owned by diffused shareholders.¹⁴ Selected examples: in the U.S., U.K., and Ireland, diffused ownership of public companies exceeds 80 percent, on average; in the Netherlands, Australia, Switzerland, Canada, and Korea, it exceeds 70 percent; and in Taiwan, Sweden, Finland, and France, diffused ownership is higher than 60 percent. In Japan, Italy, Israel, Belgium, Brazil, and Spain, diffused ownership surpasses 50 percent, and it is a shade below 50 percent in India, Singapore, and Thailand.¹⁵

      In all these countries, spanning the globe, investors wield considerable influence on the cost and availability of investment funds, on managers’ compensation and tenure, and on corporate governance and strategies via activist shareholders. A 2008 study of thirty-eight countries by Woojin Kim and Michael Weisbach documents that equity offerings for capital expenditures and R&D (both IPOs and seasoned stock offerings) are prevalent throughout the world, and with equity issuance comes the monitoring of companies by investors and often intervention in companies’ activities.¹⁶ Accordingly, the topics I discuss and analyze in this book, and particularly the actionable prescriptions I provide, are essentially universal, relevant to executives of public companies and their shareholders throughout the world.

      Much of the research I use in this book, is, however, based on U.S. data. The reason: U.S. financial databases—for corporate financial reports, stock prices, executive compensation, analyst forecasts, and R&D—are more comprehensive and cover longer time periods than in most other countries. Also, many trends, such as earnings forecasts and guidance, litigation, and stock options, start, for better or worse, in America. In addition, more researchers in the United States engage in empirical financial markets and accounting research than in other countries, accounting for the abundance of capital markets research using U.S. data. I strongly believe, however, that with few exceptions this research is relevant across the globe. Nevertheless, wherever available I use research from non-U.S. countries.

      The Shape of Things to Come

      There are three major themes in this book. The first deals with handling emergencies—putting out fires. The company’s performance unexpectedly stalls—earnings decline, consensus analysts’ forecast is missed, an IPO bombs, or a drug is rejected by the FDA. I prescribe what to do in such cases, particularly when you fail to meet the consensus analysts’ forecast or otherwise disappoint investors, and how best to communicate with investors. I outline the detrimental consequences of earnings management and information manipulation, and advance strategies to fend off class-action lawyers.

      The second theme takes the long view: how to regain and maintain investors’ trust. I outline strategies to prevent share prices from deviating systematically from intrinsic values and the consequent shocks when inflated prices revert to fundamentals. I delineate circumstances in which to guide investors concerning the future, what information beyond that legally required is beneficial to disclose to capital markets, the actions to take to bolster managers’ message to investors, and the specific corporate social responsibility policies that are good for both businesses and society.

      The third theme deals with the prickly issues of conflicts between owners and managers. First, I debunk the perennial and distracting allegation that investors are myopically obsessed with quarterly earnings, forcing short-termism on managers. I then proceed to address the important questions of how to deal with activist investors—hedge funds, in particular—and those pesky short sellers, and how to achieve an optimal shareholder mix. Next I focus on corporate governance and conduct—the presumed solution to shareholder-manager conflicts. I then turn to a major point of shareholder-manager contention—executives’ compensation—and outline the contours of an equitable compensation system. Finally, I summarize and distill the specific action plans concluding each chapter into a coherent, operational, corporate capital markets strategy.

      Throughout the book, I emphasize “critical thinking,” that is, a systematic reliance on state-of-the-art empirical evidence, carefully separating fact from fiction and causality from mere association. For example, do corporate charitable contributions enhance sales and profits (causation), or are corporate contributions just correlated with sales and profits, since profitable companies tend to give more to charities? Separating causation from association is important. The former informs managers about the benefits of actions, such as charitable contribution or share purchases by managers, whereas the latter—association—doesn’t tell managers much. Debunking widespread myths—that shareholder litigation proliferates, that share overpricing is good, that charitable contributions are a waste of corporate resources, that earnings guidance is dysfunctional, that investors are short-term oriented, to name a few—is a major objective of this book. It’s fun, too. As to details, here is a brief chapter-by-chapter outline.

      I begin chapter 1, “It’s Not the End of the World,” with the worst-case scenario: your company hits the skids—earnings stall, margins shrink, revenues stagnate—and you are facing a miss of the consensus analysts’ forecast of earnings. What’s a manager to do? Contrary to popular belief, investor reactions to earnings disappointments are in most cases both mild and temporary, and hasty measures to “make the numbers,” legit or not, are often counterproductive. The best course of action is to warn investors, outline clearly and credibly the remedial action plan, and focus on improving the business.

      Chapter 2, “Do We Have a Story for You,” deals with mending fences with investors, focusing on conference calls and other investor communication venues. I outline what works and doesn’t work in investor communications, and how to handle tough questions by analysts. I also discuss managerial communication in cyberspace—financial blogs, chat rooms, and investment communities.

      When performance stalls and shareholders are disillusioned, it is often difficult to resist the temptation to manage (manipulate) sales and earnings, particularly when managers believe—and who doesn’t?—that the slump is temporary. In chapter 3, “To Manage or Not to Manage Earnings?” I tackle the ethically charged and practically complex issue of information manipulation. Analyzing an array of SEC-sanctioned manipulation cases, I show that unless the business slowdown is short-lived—most, unfortunately, are not—earnings manipulation exacerbates the predicament, thereby hastening a painful blowout. Earnings “management” is, in fact, gross mismanagement.

      Earnings disappointments, restatements, and information manipulation are sure to draw the attention of class-action lawyers. In chapter 4, “Kill All the Lawyers?” I present both good and bad news: the myth that shareholder lawsuits automatically follow sharp stock price drops is just that, a myth. However, in certain industries (high-tech and biotech, for example) and circumstances (large, previous share price increases), the probability of being sued following bad news is rather high. Accordingly, I develop a research-based profile of litigation risk factors—akin to cardiac arrest signs—enabling you to assess litigation risk. For high-exposure companies, I design an immunization strategy to thwart lawsuits.

      From putting out fires, I shift gears to the second theme—the proactive, longer view: how to regain investors’ confidence and avoid the predicament of further disappointing them? In chapter 5, “Nothing in Excess,” I take up the sure recipe for investor letdown—an inflated stock price, rare in recessions, yet frequent in normal times. An overvalued stock, by definition, leads to investor disillusionment, steep price declines, and sometimes to shareholder litigation and managerial turnover. Accordingly, I outline techniques to determine the extent of overvaluation—as well as undervaluation—and propose the means to safely revert the price of both under- and overvalued companies to fundamentals.

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