Investors frequently receive price-sensitive information from companies in one-on-one meetings, find Erik Roelofsen and Gerard Mertens

Investors and analysts regularly get price-sensitive information in one-on-one meetings with corporate executives. That is shown by a just-released study carried out among about 400 investors and analysts around the world. Almost half of respondents (47%) say they intentionally or unintentionally receive “material” information in these talks. “This leads to inequality between investors and may distort the market,” says research leader Dr. Erik Roelofsen, who is a researcher at Erasmus University and also a director for PwC in the Netherlands. He and his colleague, Professor Gerard Mertens therefore advocate greater transparency on the part of companies, which, for example, could explicitly tell to whom they have spoken and when they did so.

Company executives regularly hold one-on-one talks with analysts and large institutional investors. Companies and investors/analysts are at liberty to exchange information on general subjects in a dialogue. With a few exceptions, companies are, however, banned from passing on share-sensitive information in their discussion with investors/analysts. Hard evidence that anyone has done this is difficult to obtain, since it is often unknown who talked to whom when. Moreover, the dividing line between what is and is not share-sensitive information is sometimes blurred in actual practice. To create greater transparency and thus a more level playing field for all, companies should reveal with whom they talked and the dates of these talks, argues Roelofsen.

Most important findings of the survey among about 400 investors and analysts worldwide

  • Around 47% of investors and analysts say that they often receive material information in on-one-one meetings with companies
  • The percentage is lower in US/Canada than in Asia, South America and Europe. This can probably be attributed to stricter legislation in the US.
  • Approximately 48% of investors and analysts themselves believe that companies ought to be more open about one-on-one meetings.

Much more common than is thought

Roelofsen thinks that the immense scale of these talks is often underestimated. “Most executives of large and mid-sized companies hold about 100 to 150 one-on-one meeting with institutional investors a year. Part of these meetings are arranged for by brokers getting a fee. The subjects being dealt with vary, but often include the strategic direction and funding of the company.”

Price-sensitive information

In the real world, the boundary between what is and what is not price-sensitive is often vague. For example, in his analysis of a certain market, a corporate executive can give off clear signals about an imminent reorganisation within his company that has not yet been made public, without his analysis itself being price-sensitive. On top of that, investors/analysts are able to make titbits of information that are not price-sensitive by themselves slightly price-sensitive by analysing them. Of course, the latter is permitted. But if the company seeks to influence this external analysis to a slight degree, we are entering a grey area. We not only have investors/analysts on record conceding that material information is often given out, but there is also the suggestive fact that the brokers who have put together the meetings are regularly requested to leave the room as soon as the talks with the investors commence.

Enforcement

It is difficult for regulators to enforce compliance with the rules, because of the blurred dividing lines between appropriate and inappropriate behaviour and also because of their limited knowledge of what happens during these talks. The US authorities have strict rules for selectively releasing corporate information. These appear to have met with some success: The percentage of investors and analysts saying that they have gotten material information is 8 percentage points lower in the US than globally. However, the small difference suggests that more stringent legislation does not offer a solution. Roelofsen states, “I don’t think that we should tightly regulate the one-on-one meetings. That would be throwing out the baby with the bathwater. These talks serve an important purpose as part of the information flow to the stock markets. I do favour a public debate about regulation, supervision and transparency. Companies could show greater openness about their one-on-one talks. Some regulators recommend making public if, when and in which conditions one-on-one meeting are held. Because of the large number of talks and the connected risks of market distortions, I advocate the creation of greater transparency by forcing companies to explicitly disclose the names of those they have talked to and when they did so, through their websites or other means. This would be welcomed by the investors and analysts themselves: 48% of them support more openness, while 22% oppose it.” Another reason for giving this subject some serious attention is the increased importance of ‘engagement’ within corporate governance, according to Professor Gerard Mertens: he argues that more and more institutional investors opt for a management dialogue to discuss important strategic and financial subjects. “Research shows that this form of shareholder activism may have positive impact  on the return for these investors”, according to Mertens.

About this study

The RSM Global Analyst and Investor Survey is a quarterly survey held worldwide among sell-side and buy-side portfolio managers and analysts. The study collects opinions and expectations about global economic developments, economic indicators and subjects that may impact the economy now or in the future. The survey is a joint effort by RSM and PwC. The research has been set up by <link people erik-roelofsen _blank>Dr. Erik Roelofsen (researcher at Erasmus University and a director for PwC) and Professor Gerard Mertens (Professor of Financial Analysis at Erasmus University). This particular survey took place between 28 March and 4 April 2011 and involved some 400 investors and analysts.