995
n
Liaisons and intrigues
would do well to do like Odysseus; Odysseus wanted to hear
the mythical Sirens sing but was less keen on shipwrecking. So
he asked his sailors to plug their ears with beeswax and to tie
him rmly to the ship’s mast. They then sailed past the Sirens;
Odysseus was overwhelmed by their music but, being restrained,
could not free himself to follow his urges and run his ship onto
the rocks.
All we need now are boards with beeswax and ofces with a mast.
I can bring the rope.
How to tame an analyst
Let’s face it; analysts are a very strange phenomenon in our
global economy. The previous pages show some examples. These
people advise us to buy, sell, or hold particular companies’ stock
but we also all know that the banks that employ them make
money if we buy. More importantly, we know that these very
same companies that they advise us on are the banks’ customers
(e.g., for their M&A deals), which makes it a rather hefty conict
of interest (especially when the real advice should be “sell,
now!”). Moreover, on what information do these analysts base
their recommendations? (1) The same oh-so-reliable numbers as
the rest of us have too, and (2) talking to the company’s sweet-
talking CEO. Oooh . . . that’s comforting . . .
It is of course a nice, glamorous perk for the average analyst;
being invited to personal audiences with a real-life CEO. Mind
you, though, if you subsequently don’t write nicely about their
company, they won’t invite you back! That’ll teach you!
Or do you think I am exaggerating, and starting to create a
parody of what is a very serious nancial business? Well, let me
tell you a story. And it is a story about facts.
Professor Jim Westphal from the University of Michigan and
Michael Clement from the University of Texas at Austin examined
this issue: the relationship between CEOs and analysts. They
surveyed a total of 4,595 American analysts and examined the
Business Exposed100
strategies and performance of the companies they made recom-
mendations on.
In the surveys, they asked the analysts to what extent they had
been given the privilege of personal access to certain top execu-
tives, in the form of private meetings, returned phone calls or
conference calls, and so on, and how often this form of individual
access was denied. They also asked them about personal favors
that these CEOs might have done for them, such as putting
them in contact with the manager of another company, recom-
mending them for a position, or giving advice on personal or
career matters. Then Jim and Mike ran some numbers.
First of all, their statistical models showed that the CEOs
of companies that had to announce relatively low corporate
earnings started to signicantly increase the number of favors
they handed out to analysts, by granting them personal meetings,
jovially returning their phone calls, and making some much-
appreciated introductions. Similarly, CEOs of companies that
were about to engage in diversifying acquisitions – a contro-
versial if not dubious strategy that the stock market invariably
hates – engaged in much the same thing. Clearly, these CEOs
were trying to sweet-talk the analysts and mellow the mood
ahead of some rather disappointing announcements they were
about to make. The question is: did it work?
What do you think? Is the Pope Catholic? Is Steve Jobs whizzier
than MacGyver? Did Neutron Jack eat all his meat?! Is Bill
Clinton heterosexual?!?! Sorry, don’t let me get carried away in
analogy here; the answer is yes.
Of course it’s yes. It works. Analysts who received more personal
favors from a CEO would rate a company’s stock more positively
when he announced disappointing
results or engaged in questionable
strategies. And if they didn’t? Yep,
you guessed it: those analysts who, in
spite of the favors, had the indignity of
downgrading the company’s stock all
of a sudden ceased to have their phone
‘‘
Analysts who
received more personal
favors from a CEO would
rate a company’s stock
more positively
’’
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.