What Are We Meeting For? The Consequences Of Private Meetings With Investors
University of Southern California – Marshall School of Business
Harvard Business School
March 2015
Journal of Law and Economics, Forthcoming
Abstract:
Using a unique dataset of all one-on-one meetings between senior management and investors for an NYSE-traded firm, we investigate the impact of these private meetings on investor decisions. We find evidence that investors who meet privately with management make more informed trading decisions in periods when they meet, increasing their position before periods of high returns and decreasing their positions before periods of low returns. This improved timing ability is concentrated in hedge funds, and does not appear to be driven by fixed investor skill, investors communicating with each other, or investors endogenously choosing to meet simply when they have pre-existing private information. The increase in timing ability is larger during periods of greater uncertainty and more public information availability, consistent with a mosaic theory of investing. Our results suggest that, despite the passage of Regulation Fair Disclosure, private meetings help a subset of investors make more informed trading decisions.
What Are We Meeting For? The Consequences Of Private Meetings With Investors – Introduction
A central question for financial regulators is how to regulate the disclosures made by firms to investors. More disclosure of information is generally thought to make securities prices more efficient, leading to a better allocation of resources in the real economy (e.g. Leuz and Verrecchia (2000)). Nonetheless, some practices that might increase price efficiency are restricted due to conflicts with other regulatory objectives.1 For example, many jurisdictions have long banned insiders with access to material, non-public information about firm performance from trading on this news until it has been disclosed to the general public. There are a variety of reasons underlying this ban against insider trading including agency issues, information asymmetry, and perceptions of fairness (Seyhun (1992), Meulbroek (1992)).
A related concern that has only drawn scrutiny from regulators quite recently is the practice of managers selectively disclosing information to particular investors and analysts. Unlike conventional insider trading, firm managers are not personally benefitting by trading against other investors. However, the selective disclosure of news by managers may reduce the willingness of investors who lack access to firm management to trade in financial markets. The practice also raises normative questions about the fairness of selective disclosure.
In light of such concerns, Regulation Fair Disclosure (Reg FD) was passed in the United States in 2000. Reg FD specified that all material information disclosed by managers had to be publicly available and accessible to all investors (SEC File No.S7-31-99). The SEC stipulated that this material information included any information “that a reasonable shareholder would consider … important in making an investment decision” (SEC), but regulators have refrained from providing more detail around this definition of materiality. Prosecutions for breaches of this law are uncommon, in part due to monitoring challenges, but are costly for the firms and individuals involved when sanctions are imposed.
Despite the passage of Reg FD, managers continue to spend a large amount of time meeting privately with investors at public conferences, investors’ offices, and the headquarters of firms. A 2010 survey showed that on average chief executive officers (CEOs) and chief financial officers (CFOs) had meetings with investors on 17 and 26 days out of the year respectively (Cross Border Group (2010)). For managers, these meetings allow them to develop relationships with the firm’s shareholders, particularly long-term block holders. The fact that investors continue to meet privately with executives in spite of the passage of Reg FD raises important questions about what benefits investors are gaining from private access to firm management and what is being disclosed at these meetings.
In this paper, we investigate the consequences of private meetings on investors’ trading decisions. Through the acquisition of a unique set of records from a mid-cap, NYSE traded firm, we have a complete compilation of all meetings between senior management and investors over a six-year period, covering over 900 meetings with 340 different institutional investors. This data allows us to analyze the impact of meetings on trades, and how such impact varies across investors.
We test whether these meetings convey information useful for making more informed trading decisions. Our first set of tests examines whether investors who meet privately with management have more correlated trades than those investors who do not. We find evidence that investors who privately meet with management have trades that are significantly more correlated with each other, but less correlated with those of other investors. The greater correlation in the direction of trades by meeting participants suggests that they have similar views on the company’s future prospects. This is consistent with these investors receiving information from private interactions with management that other investors do not receive, or with these investors having similar pre-existing information at the time of the meeting.
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