There’s an established body of research on how investor contact can affect company behavior. Most work concludes the interactions are beneficial in that the process shines more light on the corporate managers and more light is better than less.
The work picked over today is therefore of interest as it demonstrates how, in certain circumstances, increased attention from bigger institutional investors ends up encouraging a more aggressive financial reporting stance i.e a jockeying of the numbers.
In the long-run this behavior will wash out but in the short term this cozy relationship between big investors and companies prepared to gin-up results could be giving some shareholders an unfair advantage over others, especially the small fry.
Xin Cui of the Tianjin University (et al.) looked at a sample of Chinese companies listed on the Shenzhen Stock Exchange, which unlike Shanghai mandates companies report on investor contact, between 2012 and 2019.
A clear pattern emerged and the companies most likely to be trying to please their bigger investors with aggressive reporting were:
a) those with weak CEO’s, perhaps where managers cared about their own performance as expressed by short term reporting
b) firms that were in some way financially constrained and may have believed cultivating good opinion was important
c) firms in competitive industries whose managers are acutely aware of how they may be viewed in the context of competitors
The lesson for investors is clear. To know that a company is regularly visited by large institutional investors is a comfort. Except if that company has any of the characteristics identified above. In those cases closer attention to the quality of reporting is required.
You’ll find the paper in full via this link Corporate site visits and aggressive reporting.
Happy Sunday.