Disclosure
Fall 2004, Volume 16.4
Beyond Financial Reporting - An Integrated Approach to Corporate Disclosure
Required financial reports, supplemental disclosure, and interactions with investors and intermediaries should be mutually reinforcing. Through consistent communication that goes beyond the sell side’s focus on quarterly EPS, management can set the agenda for how a company’s performance is evaluated by the market and reduce pressure on operating managers to take shortsighted steps to boost EPS.
Identifying and Attracting the "Right" Investors: Evidence on the Behavior of Institutional Investors
Institutional investors can be transients, dedicated holders, or quasi-indexers. Changes in disclosure practices will shift the composition of a firm’s investor base away from transient investors and toward more patient capital. By removing some of the external pressures for short-term performance, such a shift could encourage managers to establish a culture based on long-run value maximization.
In Defense of Incentive Compensation: Its Effect on Corporate Acquisition Policy
If equity-based pay is an effective motivator, it should limit management’s inclination to overpay for acquisitions or to make unwise acquisitions. The evidence shows that bidding firms with higher proportions of equity-based compensation pay lower takeover premiums, acquire targets with stronger growth opportunities, and undertake acquisitions that are more favorably received by the market.
Making Capitalism Work for Everyone
The main threat to markets comes from “incumbents,” who want to retain their competitive position, and from those who have lost out and want to change the rules. The incentive and ability of these groups to work against free markets can be limited through policies like “safety nets” and the removal of trade barriers that control the state’s ability to favor the few at the expense of the majority.
Making Financial Goals and Reporting Policies Serve Corporate Strategy: The Case of Progressive Insurance
Progressive is a highly successful company that has never offered earnings guidance and seldom mentions earnings in its dialogue with investors. After the passage of Reg. FD, the company briefly considered providing guidance but then chose a different course: monthly release of its operating P&L. It has since seen a 50% drop in its stock price volatility.
Pathways to Success in M&A
Acquisition capabilities remain a critical component of sustainable growth and profitability, and the market continues to assign premium valuations to companies that earn above-average returns through a combination of internal spending and judicious acquisitions, as exemplified by three highly successful acquirers—General Electric, Danaher, and Illinois Tool Works.
Reappearing Dividends
The propensity of U.S. companies to pay cash dividends declined significantly through the 1990s, but there was a sharp reversal in this trend starting in 2000, pre-dating the dividend tax cut. The rebound reflects in part the need for maturing companies to pay out excess cash to reassure investors that it will not be wasted, and to restore investor confidence in the wake of corporate abuses.
Roundtable on Corporate Disclosure
A group of corporate executives, equity analysts, and academics explores the possibility that companies can increase their values by resisting the temptation to manage earnings, committing to expanded disclosure, and engaging investors in a more strategic dialogue. In so doing, they could break out of the current “bad equilibrium” in which markets distrust managers and managers distrust markets.
The views and opinions expressed in the Journal do not necessarily represent those of Morgan Stanley or its affiliates.
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For close to 20 years, the Journal of Applied Corporate Finance has distinguished itself as a unique forum for addressing the topics that drive corporate value. Featuring articles by top academic thinkers and financial practitioners, this quarterly publication presents the practical application of the best current research in finance.
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