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Investment Banks and Underwriting
The primary function of investment banks is to help their clients raise equity capital. This is often done by initial public offerings. This is where investment banks provide their biggest service i.e., underwriting. Most people have a basic understanding of underwriting. They know that when an investment bank underwrites a share issue, they guarantee to […]
Risks in Money Market Investing
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Commercial Banks and Branch Banking
The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking. Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the […]
Wall Street is very sensitive to communication. Every quarter, executives from top companies communicate their results to the street. Based on the content of this communication, the market reacts. Sometimes the market turns volatile. However, at other times the market remains stable. Apart from the content being communicated, the manner in which it is also communicated matters. Companies need to realize that financial analysts dissect quarterly results for a living. Hence, trying to outsmart them is not really a strategy that pays off too often.
In this article, we will provide information on some best practices that stellar companies have used to communicate with Wall Street.
Firstly, it is very important that the person presenting their report know their fundamentals. This job requires a more than basic knowledge of financial statements and financial metrics. This is because Wall Street analysts will never believe exactly what the spokesperson is saying. They have their own ways of analyzing the situation using cross-questioning. If the spokesperson fumbles or is rattled by this barrage of questions, analysts often end up suspecting bad news. It is therefore very important that the spokesperson be calm and well aware of the subject matter.
Analysts have to spend a disproportionate amount of time dissecting the information provided by the companies. Also, over time they have realized that genuine companies often provide straightforward results. If a company is needlessly complicating matters by including complex organizational structures and financial jargons, they may be hiding something.
The technique of using complication to hide bad news is associated with fraud companies like Enron and WorldCom. Hence, it is advisable to keep the communication simple. Also, the audience at these conferences has a limited attention span. It is advisable to use simple language and provide the news in a chronological fashion.
It is important that company executives substantiate any claims that they to Wall Street executives make with facts. Wall Street executives are different from the average audience in the sense that they are more analytical. Hence, it is better that the company presents the facts and let them form their own opinions. The pressure to meet or even exceed the Street's expectations consistently leads many executives astray. They start subverting or even misrepresenting the facts. This is a surefire way to get into legal trouble. If not legal trouble, this will at least lead to loss of reputation for the company and also financial damage in the form of regulatory fees and penalties.
Many companies tend to sugarcoat their periodic results. This means that in every quarter they only talk about the metrics that appear to be positive. The areas of concern are simply omitted from the statements. As a result, the company does not have to give out any incorrect information. However, they can target the attention of the audience towards the positive achievements.
This sort of press release would not work while presenting results to Wall Street executives. The reason is simple. Most of these executives use comparisons to get the data into context. Hence, they are likely to compare the present numbers to the previous ones. They are also likely to compare the present numbers to that of the peers. If these executives do not find sufficient data, they are trained to assume the worst. Hence, it would be better that the company disclose information in a consistent format and not try to sugarcoat any data.
Companies tend to have both positive and negative times. Companies that have stood the test of time on Wall Street have all reported negative news in their lifetime. It is true that in the short term, there is mayhem in the stock markets. The stock might take a beating and even reach a lifetime low. However, once the cloud of panic settles, the stocks return to their original valuation sooner or later.
Financial analysts are aware that ups and downs are part of any business. Hence, they respect companies that have integrity. This means that the company should be upfront about any negative news and report it in a transparent as well as timely manner.
Companies may also club several bad news into a single announcement. However, the time lag between the news and the market announcement should not be too large. Also, companies use the strategy of giving out bad news when the market is already crashing. This is because it deflects attention from their individual performance. If their stock falls on the same day as the entire market, it does not reflect very badly on the company’s performance.
Lastly, it is important that the company set proper expectations with the investing community. This is important because if the expectations are not met, then the performance of the stock in the market suffers.
Companies must give annual guidance instead of quarterly guidance. This signals to their investors that they are more concerned about long-term results than about meeting short-term targets.
Quarterly guidance always keeps the management in a rush. The management keeps trying to meet the numbers. As a result, misreporting and unethical practices become the norm. Also, the focus of the business shifts from customer service to meeting investor expectations.
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