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The Harvard Law School Forum on Corporate Governance and Financial Regulation, January 9, 2012 posting


The Consequences of Private Meetings with Investors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 9, 2012 at 9:22 am

Editor’s Note: The following post comes to us from David Solomon of the Department of Finance at the University of Southern California and Eugene Soltes of the Accounting and Management Unit at Harvard Business School.

Private meetings between executives and investors consume a significant amount of managerial time and offer investors a potentially unique window into a firm’s operations. In our paper, What Are We Meeting For? The Consequences of Private Meetings with Investors, which was recently made publicly available on SSRN, we investigate which funds meet privately with management and the consequences of these interactions.

We find that certain types of investors are more likely to privately meet with management including those with more assets, greater turnover, closer physical proximity to the firm, and greater holdings of the firm. We also find that hedge funds are also more likely to meet with management. These findings are consistent with the incentives of both sell-side analysts (who arrange meetings for investors that offer the greatest revenue opportunities for the sell‐side analysts’ firm) and investors who have the most to gain from meetings with management.

We also examine whether private meetings convey information to investors and whether this information is useful for making more informed investment decisions. We find that investors who meet with management trade in a more correlated fashion. We also find evidence that investors who meet with management make more informed trades by increasing the size of their position before periods of high returns and reducing their position before periods of low returns. In addition, the increases in both correlation and timing ability are concentrated among hedge funds and are not evident for mutual funds or pension funds.

Recent regulation, and specifically Regulation Fair Disclosure (Reg FD), specifically sought to level the informational playing field for all investors. Reg FD specified that any material information disclosed by management needed to be made public and available to all investors, but it did not prohibit private one-on-one meetings. Thus, it is important to note that managers need not be in violation of any regulation by privately meeting investors. The information discussed may not be material on its own, but may become material only once it is interpreted together with other sources of information that the investor has collected. Under this view, information acquired during meetings is only useful within the larger context of an investor’s investigation and for investors who know how to appropriately process the information. From the standpoint of Reg FD, this “mosaic theory” of information gathering is excluded from the scope of the regulation. Our results are consistent with the mosaic theory – inasmuch as hedge funds are often considered more sophisticated investors, they may be better able to process the information in meetings, or in possession of other information which makes the discussions in meetings especially valuable.

Our analysis does not address whether private meetings lead to overall gains in financial markets or instead merely transfer surplus between participants. Indeed, the prohibition of all private meetings between management and investors may not be desirable, even if it were feasible. Nonetheless, our results support the position that permitting private meetings between management and investors undermines regulators’ objective of wanting all investors to have equal access to information. To the extent that our results are consistent with the mosaic theory, they suggest that the distinction between ‘material’ and ‘non-material’ information is more subtle than typically envisaged in regulations.

The full paper is available for download here.



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