Matt Levine is a Bloomberg View
columnist. He was an editor of Dealbreaker, an investment banker
at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell,
Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals
for the Third Circuit.
What Do Investors and Companies Talk
January 8, 2018 9:42 AM
One thing that we
talk about a
here, but that no one in the wider world seems quite to believe,
is that public companies frequently meet in private with their big
shareholders to discuss their business. This, people think, is not how
it's done: The stock market is meant to be a level playing field, no
one is supposed to trade based on inside information, and it's
obviously not fair for investors to meet privately with corporate
managers and ask them questions and trade based on the answers. And
so everyone assumes that they must not. "There's regulations that stop
that, talking to analysts," Justice Sonia Sotomayor
confidently told a lawyer during a Supreme Court argument over
She is not exactly wrong:
Regulation FD (for "fair disclosure") is a Securities and Exchange
Commission rule that prohibits companies from giving material
nonpublic information to some shareholders privately without
disclosing it to all shareholders publicly. And yet shareholders are
constantly meeting one-on-one with companies, and trading after those
meetings, and rewarding Wall Street analysts for setting up the
meetings. So ... what do they talk about?
Broc Romanek) is a recent paper, by Jihwon Park and Eugene Soltes
of Harvard Business School, called "What
Do Investors Ask Managers Privately?" They embedded a researcher
in a bunch of one-on-one meetings between two public companies -- a
biotechnology company and a defense contractor -- and their investors,
and wrote down the questions that were asked. (The researcher "sat in
attendance in all meetings immediately behind the firm executives" so
as not to throw anyone off.) It is a pleasing read:
investor relations officers (IROs), we devised a classification
system for the questions posed by investors and found that they
can be categorized into five distinct groups. The first type
seeks more detailed insight and clarity of information that is
already publicly available. For example, for the biotechnology
firm in our sample, one investor asked if the final product
would be manufactured in the same facility as the product used
in regulatory trials. Other types include questions inquiring
about management philosophy (e.g. “What keeps you up at
night?”), questions seeking public information more efficiently
(e.g. “Can you tell me about the level of share ownership by
senior management?”), and questions seeking managers’ feedback
on proprietary ideas and investment theses (e.g. “What looks
more attractive right now: M&A activity or share buybacks?”).
fifth type of questions are those seeking more timely
information from managers. These are questions where the
investor seeks data or information that is more recent than that
available from public sources. For instance, one question that
we observe investors frequently asking is around current cash
holdings. Notably, the investor is not seeking the figure
publicly disclosed in the 10-Q a month prior to the meeting.
Rather, they are seeking to acquire an update of the financial
statement information as of the date of the meeting.
Obviously my favorite of the five question types is what the
researchers call "efficiency questions," which are just laziness
Investors that ask questions regarding information that is readily
publicly accessible we describe as investor efficiency questions.
These questions do not require the expertise of senior management
(e.g. CEO) to answer. The information could have been easily acquired
by the investor in advance of the meeting had they taken the time to
seek it. In most instances, these questions focus on financial market
information about the firm (e.g. stock price, managerial ownership).
Investors that ask these questions are able to rapidly acquire
information from management which is efficient for investors, but an
ineffective use of senior executive time.
Much of business consists of trying to use your time efficiently by
inefficiently using someone else's time.
But the other four question types have the obvious potential to be
material and nonpublic. They don't have to be; if you ask a
biotechnology chief executive officer "what keeps you up at night" and
she replies "my neighbor's apartment renovation," then you probably
don't have much to trade on. But the most plausible reason you would
ask any of these questions is because the answer might be material to
you, because it might "significantly alter the 'total
mix' of information available" to you in making your investment
We talk a lot about insider trading, so it is worth emphasizing this.
Investors can ask companies for material nonpublic information,
whenever they want, though they won't necessarily get an answer:
An investor can legitimately seek any piece of information they want
(e.g. quarterly EPS number). However, under Reg FD, it is the
managers' responsibility to not provide material information
selectively to an investor even when asked. In particular, it is the
failure of management – not the investor – under Reg FD if material
information is conveyed during a private meeting.
If you go to a one-on-one meeting and ask a CEO "what is your cash
balance," and she tells you, and you trade on it, that's not insider
you are friends with her, or helping her get a new job, maybe! Not
legal advice!) At most -- if the answer is material -- it is a
Regulation FD violation, but that is the company's problem, not yours;
you are free to trade. The background assumption of insider trading
law is that this never happens, that companies are careful to comply
with Regulation FD and would never answer a material question like
that. But then why do the investors keep asking?
Park and Soltes don't exactly tell you how material any of the
information was, though they do analyze investors' propensity to trade
after asking different question types. Mostly though the paper is full
of charming data about how investors actually do their jobs. For
instance, good investors ask good questions:
Investors who are more experienced and meet with managers of the firm
more often are more likely to ask timely questions. Moreover,
investors who hold a position in the firm, work for larger funds, and
meet more often are less likely to ask efficiency questions that are
readily answered by referring to public data sources.
And one-on-one meetings at conferences are especially to-the-point:
The number of questions asked during roadshows and private calls
tended to be higher than conferences. One reason for the statistically
greater number of questions asked during roadshow events, however, was
the fact that the events were longer in duration. ... In this case,
investors actually utilized their time more efficiently in conferences
than roadshows by asking more questions per hour. Thus, investors ask
more during roadshow events, but investors’ use of questioning is more
rapidly paced during conferences.
And investors are meaner in private meetings than analysts are in
public earnings calls:
In this spirit, we find that both the mean and median tone in public
remarks is considerably more positive than that during private
interaction. This difference in tone suggests that individuals may be
more willing to critically question executive during private
interactions when it is less likely to embarrass management.
The researchers do not seem to have recorded whether the
companies answered the questions.
♦ ♦ ♦
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