Investor conferences that companies host bring many benefits to their shareholders, but they also have a dark side in that they facilitate “managerial opportunism,” as Wharton research has found. In some companies, managers use the increased visibility around the conference to “hype” their company’s stock, which helps insiders profit, according to a recent paper titled “The Dark Side of Investor Conferences: Evidence of Managerial Opportunism” by Wharton accounting professors Brian Bushee, Daniel Taylor, and Christina Zhu.
The research by the Wharton professors found that in the days leading up to an investor conference, “managers increase the quantity of voluntary disclosures; these disclosures are more positive in tone and increase prices to a greater extent than post-conference disclosures; and these disclosures are more pronounced when insiders sell their shares immediately prior to the conference.” In cases of disclosures and net sales of company stock by insiders before a conference, they found evidence of “large positive returns” before those events and “large negative returns” after the conference. In these cases, insiders were able to profit by selling their shares at inflated prices and avoided potential losses from the return reversal after the conference.
Typically, investor conferences are important events where several companies share information about their performance and outlook. They usually trigger higher prices, trading volumes, and liquidity in a company’s stock; they also encourage more institutional investors and analysts to “follow” the stock.
“There’s a lot of anticipation and attention from the media and from investors about an upcoming investor conference, and [company] managers take this opportunity to issue a lot of disclosures during this period before the conference,” said Zhu. “Managers think, ‘Let’s hype up the firm, let’s take advantage of this attention and say nice things about what’s going on at our firm.’ And then this disclosure behavior increases the stock price.”
Clearly, such conferences are useful settings for company managers to “frame the narrative and provide voluntary disclosures to favorably skew conference interactions and potential questions from analysts and investors,” the paper stated. As high-visibility events, these conferences present the right incentives for managers to boost market perceptions with pre-conference disclosures, and thus they have “the potential to temporarily inflate stock prices,” the authors wrote.
“Managers think, ‘Let’s hype up the firm, let’s take advantage of this attention and say nice things about what’s going on at our firm.’ And then this disclosure behavior increases the stock price.”— Christina Zhu
Shareholders that are not aware of this behavior by company managers could of course be misled by the temporary increase in stock prices. They could get shortchanged when company insiders buy or sell stock at prices that then revert. Unlike with earnings announcements and other regulatory disclosures, investor conferences are not typically accompanied by trading blackout windows that protect shareholders, the paper pointed out.
The study analyzed data on investor conferences by nearly 5,400 companies between 2008 and 2016, more than 122,000 company presentations, and share price trends 30 days before and 180 days after each event.
The study found that company insiders with net sales before a hyped-up conference on average avoided losses of a little over $208,000 and on average made trades of $1.3 million. Interestingly, that average loss avoidance is similar to that in prosecuted cases of insider trading, the paper noted.
It focused on three types of management disclosures: management disclosures, voluntary 8-Ks and press releases put out by the firms. It also examined managers’ incentives for net sales before investor conferences. Graphic presentations of the findings showed sharp spikes in management forecasts and voluntary 8-K disclosures (used for announcements of share issuances, dividends/stock splits, or agreements made by the company), and also in insider net sales around conferences and earnings announcements. Next, it looked at share price patterns before and after a conference, which helped it establish that returns are indeed higher before such events.
Insiders sell shares to take advantage of the artificially high prices they are able to create before an investor conference. The study found evidence of that: “Consistent with our prediction, we find that the increase in the quantity and tone of pre-conference disclosure, as well as the associated price increases, are more pronounced when insiders have net sales immediately prior to the conference.”
The potential for insider trading in those settings comes with consequences, of course. Pre-conference disclosures and insider net sales in that window are accompanied by an increased probability of securities class action lawsuits, the study found. “Although hyping the stock and selling their shares at inflated prices personally benefits the manager … the long-term costs of this behavior are primarily borne by the firm and its shareholders,” the authors wrote.