Analyst/Investor Days Recognized as Important Corporate Communications
by Stan Markov|
With literally troves of corporate information available online for analysts to sift through, how can firms differentiate their message and convey complex, meaningful information to those who need it? The increasing number of analyst days, a long-form presentation by publicly-listed companies, indicate a trend toward a greater demand for face time with management. In novel research, Accounting Professor Stan Markov of SMU Cox and co-author Marcus Kirk study analyst/investor days as a disclosure medium that large firms with complex operations use to deepen stakeholders' understanding about the firm's outlook and valuation.
Markov offers color on how analyst day benefits accrue, "Recall that institutional investors demand and value access to management. So firms that host analyst/investor days make themselves even more attractive to institutional investors, which should lead to more trading and greater liquidity." Around analyst/investor days, the authors find a significant bump in return volatility and trading, compared to a conference presentation.
Disclosure with benefits
Analyst days tend to be geared toward institutional investors and influential capital market players. The authors say, "Informal interactions between managers and analysts and investors play a unique role in corporate disclosure." The information conveyed by management to analysts helps them evaluate managerial talent and credibility, requiring a softer more nuanced communication platform. Analyst/investor days typically range from half a day to one-and-a-half days and feature presenters that include top management, as well as important stakeholders. In comparison, at brokers' conferences, firms present for 30–45 minutes with a short Q&A period.
The longer duration of analyst/investor days allows firms to go into greater detail regarding complex topics and to expand upon softer valuation concepts. A firm that grows through acquisitions may include a session that discusses the rationale for and the synergies from recent acquisitions, say the authors. At an Energy Transfer analyst day last year in Dallas, the management devoted time to a full session about a major liquefied natural gas (LNG) project, for example. A recent acquisition, the expansion and development of the LNG project was of high interest as the U.S. starts to export LNG. Numerous projects are to be brought online and thus commercial viability is being questioned by market participants regarding which projects will take off.
In essence, the demand for access to and interactions with management appears to be growing. " With the vast amounts of information dumped into the market, analysts are losing their edge with others competing with them in online venues, for example," Markov notes. "Demand for access to management gets stronger in this case. Companies compete for capital and want to raise it at the most favorable terms. By meeting with analysts you may be able to broaden your investor base, attract analyst following, and ultimately lower your cost of capital.
With so many factors affecting cost of capital, teasing out the analyst/investor days’ unique effect poses a serious challenge, and it is left for future research.
But the larger effect of analyst/investor days was a price effect. "We benchmark against conference presentations, and the effect on stock price and turnover is four to six times as much," says Markov. The study finds that "analyst/investor days convey substantial new information to the market." Three-day abnormal absolute return and three-day abnormal share turnover increase by about 29% and 27%, respectively, they document.
Study details
The study covers the period 2004 - 2013, with a sample of 3,802 analyst/investor days hosted by 1,692 firms. This data only recently became available, and the authors are one of the first academic teams to systematically analyze a large sample. They contribute to a small but growing stream of the "disclosure literature" about private interaction between management and capital market participants, in comparison to that which is publicly broadcast.
In the first two years of the sample, around 200 firms held analyst days, increasing to more than 500 in the last two years. That's 12% of publicly-listed firms. The study notes: "Firms that choose to participate in analyst days and broker-sponsored conferences are bigger, younger, more likely to have professional investor relations, have higher analyst and institutional following, operate more segments, and engage in more R&D and M&A activities." The authors also conclude that there are "fundamentally different" cost-benefit trade-offs in comparison to broker conferences.
Firms that participate in analyst/investor days also typically present at conference presentations as well. "When a firm makes a conference presentation soon after hosing an analyst/investor day, there is no extra return volatility around the conference presentation, suggesting analyst/investor day’s information content cannibalizes that of a conference presentation.
A wide range of managers are involved in presentations at analyst day, and this meets the information requirements of analysts and institutional investors. Some firms are more difficult to value, owing to many segments, M&A activity, return volatility, and intangible assets. Thus a large number of managers who "possess information essential to understanding the firm and projecting future cash flows" help investors quantify the firm's value, the researchers offer. It is therefore more efficient to involve these individuals in the disclosure process. Findings reveal that on average nine managers participate at these events. Markov notes that a portfolio manager investing millions of dollars in company stock on behalf of thousands of investors should be able to gather nuanced and complex information and assess the quality of company managers through face-to-face meetings.
The study offers managers an "effective communications strategy" and insight for investors about gathering information efficiently. "Come on over."
The paper "Come on Over: Analyst/Investor Days as a Disclosure Medium" by Stanimir Markov, Cox School of Business, Southern Methodist University and Marcus Kirk of University of Florida is under review.