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Careful academic research documents what everyone knows about preferential access


For the research paper referenced in the article below, see

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Note: The issue of preferential access to corporate information was one of the professional investor concerns addressed by the Shareholder Forum's initial 1999-2000 programs that encouraged the adoption of SEC Regulation FD, and has been has been a subject of continuing participant interest.


Source: Bloomberg View, January 8, 2018 commentary






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 About?

By Matt Levine

January‎ ‎8‎, ‎2018‎ ‎9‎:‎42‎ ‎AM


One thing that we talk about a lot around 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 insider trading. 

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?

Here (via 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:

Working with 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?”).


Finally, the 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 questions:

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 decisions. 

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 trading. (Unless 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.

♦ ♦ ♦

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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