A NEW study by prominent accounting professors has found evidence that big investors benefit from information they glean in private meetings with company CEOs – and they say their findings raise questions about whether such meetings meet the spirit of Regulation Fair Disclosure (Reg FD).
The study adds to the mounting evidence that large traders are gaining an unfair advantage from so-called “corporate access” events, including private one-on-one meetings and small-group breakout sessions with company CEOs at investment conferences organized by brokerage firms.
Corporate access is big business, with Greenwich Associates recently estimating that US institutional traders are allocating around $1.4 billion in trading commissions to brokerage firms that set up private meetings for them with company executives.
In May, the Wall Street Journal sparked a public storm when it called attention to the long-standing practice of corporate executives and investment bankers meeting privately with institutional traders. The same month, a survey of 400 investors and analysts by PwC and the Rotterdam School of Management found that 47% said they often receive material information in one-on-one meetings with companies.
“Investors exploit selective access”
In the latest study, professors Brian Bushee of the University of Pennsylvania, Michael Jung of New York University and Gregory Miller of the University of Michigan say they have found evidence that “investors exploit their selective access to management to execute larger and more profitable trades.”
The researchers say their evidence “raises questions about whether conference presentations meet the spirit of Reg FD in encouraging equal access to information across all investors.”
The professors studied a sample of 7,668 transcripts of presentations between 2003 and 2008 to identify conferences where CEOs held one-on-one meetings or private breakout sessions with investors in addition to their public appearances, then studied stock trading before and after the public presentations.
They found significantly greater increases in trade sizes in the hours before and after the presentation for firms providing one-on-one access and in the hours after the presentation for firms providing breakout sessions. They also found significantly greater increases in trade sizes in the hours after the presentation when the CEO is present.
“This evidence is consistent with selective access through formal off-line meetings and CEO attendance providing investors with information during those meetings that they perceive to be valuable enough to trade upon,” say the authors.
They also found that firms that provide private access experience “significantly greater potential trading gains over three- to 30-day horizons” than firms that do not hold private meetings at investor conferences.
“Thus, in the case of off-line access, investors are not only changing their beliefs based on their private access to management, but their trades appear to be profitable over a short horizon,” say the professors, who concede that they cannot determine conclusively that executives are violating Reg FD by providing selective disclosure to investors in private meetings.
Important questions for regulators
These findings raise important questions for regulators since evidence that some traders are gaining an unfair advantage by paying large sums for access to management can undermine investors’ confidence in the fairness of the markets and make them less willing to participate.
And given the large sums institutional investors are now allocating to brokerages that provide corporate access, questions arise about how corporate access may be influencing analyst research.
In some ways, corporate access is the new investment banking with companies potentially able to influence analyst coverage through how they allocate access to their executives and which brokerage firm conferences they are willing to attend.
The findings are presented in the paper Do Investors Benefit from Selective Access to Management?