Tuesday, 23 May 2017

Better Investor Communications

Managers should communicate with investors to help align the value of the stock with the intrinsic value of the company.

Negative consequences of an underpriced stocks

If the stock is underpriced, a few of the negative consequence are that:
  • employees may be demoralized, 
  • the stock is less useful in stock acquisitions, and 
  • the firm may become a takeover target.

Negative consequences of an overpriced stocks

If the stock is overpriced, the price will eventually fall, which will lead to:
  • a fall in employee morale and 
  • increased tension between the board of directors and the managers.
  • Also, once the stock is overpriced, managers may engage in value-destroying activities in an attempt to prop up the stock price.

How can companies improve investor communications?

Three ways many companies can improve investor communications are to:
  1. monitor the gap between price and intrinsic value,
  2. understand the investor base, and 
  3. tailor communications to the investors who matter most.

In general, the managers should try to communicate with sophisticated intrinsic investors because the activities of these investors have the most impact on the price of the stock.

Managers should be honest and not use gimmicks such as changing the metrics reported each period to give the most favourable numbers.

How useful is earnings guidance?

Earnings guidance does not provide any discernible benefits.

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