Corporate Eye

Using Simple Math to Inform Your Disclosure Policy

making it clearOne of the main channels of communications between corporations and investors are sell side analysts.  They are useful in any number of ways, including as industry experts, creators of detailed financial models of the companies they cover, entry points to very sophisticated sales forces and as the ones who have a recommendation on your company’s stock. However, how they spend their time is often misunderstood.

Based on personal experience, the perception among corporate executives is that analysts spend their time in front of their computers doing research and constructing earnings models, interspersed with an occasional phone call and the odd trip to visit company management. Yet this is well off the mark, and its implications can have a serious effect on a company’s approach to investor relations.

I’m not aware of any academic research considering the relations between sell side analysts and corporate investor relations departments, so I am going to confine myself to a few simple calculations in order to make my points.

The first thing to consider is the number 50%. That is the percentage of time sell side analysts tell me they spend on marketing to the buy side, the investment shops that actually buy, sell and hold securities. So if your average workaholic sell side analyst is putting in 60 hours a week at their job, that means at most 50% of their time, or 30 hours, can be devoted to research on companies they follow. Consider next that the average sell side analyst covers between 10 – 15 companies. If we give the sell side the benefit of the doubt and say they cover 10 companies, that means on an average week they have 3 hours to devote to any single company. And that does not allow for any work the analyst may do on industry wide analysis and deals the investment banking department may want input on. What this means for investor relations is that sell side analysts are very time stressed.

Many companies take the position that the job of an analyst is to analyze and the company should not have to spoon feed them information about the company and the industry. In an ideal world this would be true, but the reality is that the easier you make it for the analyst to get good information, the more likely their analysis is to be accurate. This is because they often don’t have time to go out and get good information on their own.  If on average an analyst has three hours a week to produce quarterly notes, chase down buy side requests for information and talk to company management, it doesn’t leave a lot of time for incisive research and writing.

From an investor relations policy standpoint, this means that companies should think about establishing baseline disclosures, beyond what is mandated by regulation, that can help analysts understand the company and the trends it faces. By getting the basics out of the way, this will allow time strapped analysts to focus on what’s important and they have a better chance of getting it right. It’s one of those rare instances where by helping someone else out, you can also help yourself.

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John Palizza

John recently retired as a Lecturer in Management at Rice University’s Jones Graduate School of Management, where he taught investor relations. Prior to that, John was in charge of investor relations for Sysco Corporation and Walgreen Co. He holds a MBA from the Kellogg Graduate School of Management at Northwestern University and a law degree from Loyola University of Chicago. You can learn more about John’s thinking about investor relations at his blog, Investor Relations Musings.