Winning Investors Over. Baruch Lev

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СКАЧАТЬ investors is an effective, yet hotly debated way to prevent prices from straying from fundamentals (intrinsic values) and regain managers’ credibility. In chapter 6, “Guiding the Misguided,” I analyze earnings guidance and show that, despite the vehement objection by various business associations and sage investors like Warren Buffett, guidance under the right circumstances is a very effective tool for narrowing the information gap between managers and investors and keeping the stock price close to fundamentals.

      Guidance refers to near-term earnings or sales prognostications. In chapter 7, “Life Beyond GAAP,” I considerably expand the scope of disclosure to deal with the voluntary release of information that complements and sometimes substitutes for the statutorily required, yet often deficient disclosures. I show that beyond-GAAP disclosures—such as on the scope and depth of the product pipeline of biotech and pharmaceutical companies, royalty income from patent licensing, or customer growth rates and churn of subscription-based companies—are richly rewarded by investors in reduced cost of capital, lower stock price volatility, and higher analyst following.

      Actions, goes the saying, speak louder than words. Indeed. In chapter 8, “Put Your Money Where Your Mouth Is,” I switch from communications to real managerial actions, such as dividend changes, stock splits, and stock repurchases; the use of reputable (and expensive) underwriters; and increases in managers’ and directors’ stock ownership in their company. I bring to bear extensive research documenting which actions work and which fail to change investor perceptions.

      In chapter 9, “Is Doing Good, Good for Business?” I examine whether it makes sense for corporations to engage in environmental, community, poverty-reduction, and health-care activities, even if they don’t enhance the bottom line. I conclude that these days it’s irresponsible not to be socially responsible and offer answers on how much, where, and when.

      Chapter 10, “In the Long Run, We’re All Dead” (John Maynard Keynes’s immortal—or, rather, mortal—quip), opens the third theme: owners versus managers. I start by removing a major obstacle to effective interaction with shareholders: the popular belief in investor myopia (short-termism). The evidence I present conclusively shows that long-term investors dominate the market, and most shareholders care a lot about your company’s long-term prospects. Accordingly, don’t waste time and energy lamenting investor myopia and appeasing short-term-oriented investors. But, while most investors aren’t myopic, short sellers definitely are, and I suggest how to deal with them.

      While not necessarily myopic, “activist” investors can make life hell for managers and directors. In chapter 11, “Breathing Down Your Neck,” I deal with the worldwide rise in shareholder activism, particularly the recent strain led by hedge funds. I show that, contrary to widespread belief, hedge fund and institutional investor activism is often a good thing, driving up shareholder value and improving corporate governance. Based on a profile of targets of activism that I develop, you will be able to ascertain how vulnerable your company might be to activist attack, and what you should do if it were to happen.

      In the wake of the corporate scandals of the early 2000s and the ensuing legislation, some boards are coming to resemble shareholder activists. Directors are increasingly assertive in overseeing corporate performance and managerial conduct, evidenced by growing managerial turnover. In chapter 12, “Looking Out for You, Dear Shareholder,” I take the unconventional view that the relentless move toward a full monitoring board has gone too far. In many cases, independent directors lack expertise in the company’s business and technology, depriving managers of much-needed advice. I call for a rebalancing of the board and other governance mechanisms to enhance both the monitoring and advising of managers. A friendlier, more effective board, so to speak.

      Managers’ compensation is a major irritant to shareholders and the public at large. I analyze the thorny issues of compensation in chapter 13, “Excess or Excellence?” and conclude, based on evidence, that the major problem with managers’ pay is the prevalent weak link between compensation and company performance. I point at the urgent need to substantially restructure managerial compensation systems to streng-then their link with long-term value enhancement and to curb manipulation and abuse.

      Chapter 14, “What Then Must We Do?” distills the specific prescriptions and action plans—operating instructions—that conclude each chapter into a coherent corporate capital markets strategy. Essentially, I provide a comprehensive prescription for what to do and not do to satisfy investors.

      Chapter 1

      It’s Not the End of the World

      What to Do—and Not Do—When Faced with Missing the Consensus Earnings Estimate

      In This Chapter

       Why a one-penny miss of the consensus is so deleterious.

       What factors determine investors’ reaction to companies’ results.

       Why high-growth companies that disappoint investors are hit hard.

       What actions managers can take to avoid a consensus miss, and its consequences.

       What course mitigates investors’ response to disappointments.

      On June 26, 2007, the Kroger Company reported a 10 percent rise in first-quarter profits. The supermarket chain’s shares, however, fell 4.7 percent (the S&P 500 rose 0.6 percent).¹ What gives? Kroger’s EPS, coming at $.47, missed the analysts’ consensus earnings estimate by a penny—the dreaded consensus miss.² What happens to other companies that miss the consensus? Will their price drop further and linger on in a funk, or pick up with the improvement in business fundamentals? What types of companies are penalized harshly for missing the consensus and which remain largely unscathed? On the bright side, what happens when you “make the numbers”—meet or beat analysts’ estimates, or surpass last year’s EPS? And does it all matter beyond the few days surrounding the earnings release? The extensive evidence on these and related questions dealing with what is often dubbed “the earnings game”— managers’ continuous struggle to meet investors’ expectations—is highly revealing and will be analyzed next. At the chapter’s end, I advance a consequence-mitigation action plan for executives facing the specter of disappointing investors. In a nutshell, as indicated by this chapter’s title, missing the consensus, if dealt with appropriately, is not the end of the world. Far from it. In contrast, desperate attempts frequently taken to avoid disappointing investors by a last-minute sales blitz or cost cuts, an earnings boost from a change of accounting procedure, or—worst of all—manipulating the numbers are at best ineffective and often seriously counterproductive.

      The Not-So-Bell-Shaped Earnings Surprises

      Many wonder why investors take so seriously an earnings consensus miss, even by a penny. Simply, because relatively few companies get entrapped in this predicament. Look at figure 1-1 from Mei Feng’s 2008 study of quarterly EPS surprises, which displays the difference between reported EPS and the last consensus estimate available prior to earnings release. Feng’s sample is very large and representative: 180,000 quarterly observations from 1988 through 2005, an average of 2,500 companies per quarter. The highest bar, situated in the center of the graph, indicates that roughly 24,000 observations (about 13 percent of the sample) were perfect hits, where reported EPS matched the consensus to the penny. Many companies fared even better: the three successively decreasing bars to the right of zero surprise indicate that about 47,000 cases—over a quarter of the sample—beat the consensus by $.01 to $.03. Thus, a whopping 71,000 cases, almost 40 percent of the sample, meet or beat by $.01 to $.03 the analysts’ forecasts. This, mind you, is the optimal play of the earnings game. You want to beat the consensus, but not handily, lest СКАЧАТЬ