Book Review: Winning Investors Over
Winning Investors Over: Surprising Truths about Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price. 2011. Baruch Lev.
The job of management is to maximize corporate value, which leads CEOs to seek ways to boost their companies’ stock prices. Although generating consistent long-term earnings growth for shareholders would seem the obvious path to reaching that goal, every company will experience difficult times. The question is whether shareholders will regard a down quarter or year as simply a short detour on the overall journey or consider short-run earnings misses significant.
In Winning Investors Over: Surprising Truths about Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price, Baruch Lev helps managers deal with these issues. Lev, the Philip Bardes Professor of Accounting and Finance at New York University’s Stern School of Business, draws on his own research and that of other academicians to dispel a number of myths about investor relations.
Unlike many other academics, Lev writes entertaining and free-flowing prose that makes Winning Investors Over an enjoyable read. Rather than present his supporting data in the arid style of scholarly journals, he weaves the facts and figures into lively stories about specific companies and how the reporting of the information affected each company’s stock price.
Lev begins by pointing out the importance of restoring investors’ trust in management. Over the past decade, financial markets have experienced shady accounting practices and outright fraud, beginning with the debacles of Enron Corporation and WorldCom through the recent collapses of Bear Stearns, Lehman Brothers, and Countrywide Financial. The consequences extend beyond investor disillusionment to include passage of the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. These statutes not only mandate costly new regulatory filings but also may hinder companies in their efforts to pursue profitable business activities and to attract and retain qualified employees.
One of the most controversial issues for management is whether to provide guidance on future earnings. For some, guidance is an important part of conveying relevant information to the market. For others — most notably Warren Buffett, a longtime critic of the process — it can lead to accounting gimmicks as management stretches to reach the guidance number. In recent years, there has been some movement away from providing such guidance, encouraged by a CFA Institute recommendation to end the practice.
A number of legitimate questions bear on the wisdom of doing away with earnings guidance:
- Does earnings guidance increase or decrease the risk of lawsuits?
- Might the demand for guidance encourage management to avoid the earnings-reporting process altogether by moving to the private market?
- Does providing guidance waste valuable management time?
After reviewing the relevant research to answer these and other questions, Lev concludes that properly implemented guidance can play a positive role.
Throughout the book, the author dispels misconceptions about investing. For example, in a world where maximizing corporate value is the goal, it would seem that the higher the stock price, the better it is for management. Lev points out, however, that overpriced shares can be as detrimental as underpriced shares because shareholders act with a vengeance once they recognize the overpricing. In addition, companies sometimes use their overvalued currency for ill-conceived acquisitions — think AOL Time Warner. Furthermore, overpriced shares and bad acquisitions make it impossible for management to deliver the long-term performance that shareholders demand. Lev maintains that management can avoid such problems by providing measured and credible guidance to keep the share price in line with the economic fundamentals.
A relatively new approach to gaining credibility with shareholders, the concept of corporate social responsibility consists of portraying the company as a contributor to society in ways that go beyond profits, generally by using advertising that spends less time touting the quality of the product and more time describing its benefits to society as a whole. Examples include a General Electric ad showing a busload of cancer survivors visiting a GE plant that makes the scanners that identified their tumors and the ads for auto companies that highlight their environmentally friendly hybrid and electric cars and the safety features that will make “all cars safer.” Through these messages, companies hope to build up their social capital.
Is corporate social responsibility just the catchphrase of the day, or is it an insurance policy that pays off when a social or environmental mishap occurs? Lev examines the literature and finds that although the research is still in its infancy, investments in corporate social responsibility seem to mitigate the damage from corporate stumbles. His advice is to pursue social responsibility not only when it fits into a company’s overall strategy but also when it doesn’t — so long as doing so does not limit a company’s ability to meet its strategic targets.
Although the book is intended as a manual for corporate senior management, the lessons from Winning Investors Over extend to both shareholders and analysts. Much of the research that Lev cites shows that offering honest, forthright information about negative developments has little detrimental short-term or long-term impact on a company’s stock price. Investors and analysts who bail on a stock simply because management has reported truthful information about future challenges may subsequently regret their actions.
In the end, honesty would appear to be the best policy not only for individuals but also for corporations. Lev has written an enjoyable and informative handbook for those who wish to learn how best to win investors over and what kind of information genuinely influences the price of a stock.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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