Chapter 7 / Lecture 5

Question 1

Transparency Benefits:

Answer 1

more liquidity (easier to access cash) and trust
better relationships, valuations, reputation
lower volatility (not riding market wave) and cost of capital (reserves)

Question 2

selective disclosure

Answer 2

when select market participants get material/nonpublic info about public company ahead of broader market

Question 3

Martha Stewart/ImClone

Answer 3

sold share in biotech a day before public learned FFDA was not renewing ImClones application for cancer drug - friend of ImClone founder who tipped her off

Question 4

Enron

Answer 4

after SEC investigation, found to have used accounting loopholes to hide debt & inflate earnings by keeping debt off balance sheet/pressuring auditors to ignore - Enron bankruptcy, 20 000 jobs lost

Question 5

securities

Answer 5

financial instruments - represent financial value such as ownership interest in company (stocks), money borrowed that must be repaid (bonds

Question 6

materiality

Answer 6

info that is substantially likely to be important to an investor when making investment decisions

Question 7

1929 Stock Market Crash

Answer 7

insiders sold stocks en masse due to knowledge of failing business conditions - had unfair advantage, led to great depression

Question 8

Securities Act 1933

Answer 8

oversees integrity of security markets, ensures investors receive timely/accurate/complete info before investing

Question 9

Securities Regulation

Answer 9

SEC (US and many publicly traded companies)
Canadian Securities Administrators
Provincial Securities Regulators

Question 10

Information Asymmetry

Answer 10

when one party has more/better access to info than other parties - insiders include executive officers, board members, large shareholders

Question 11

disclosure theories

Answer 11

when one side of market believes the other has more/better info, mutually beneficial transactions/relationships are challenged

Question 12

signalling theory

Answer 12

how/why market participants engage in costly/observable behaviours (ie signals) to reduce information asymmetry

Question 13

agenda-building theory:

Answer 13

practice of sharing info as pre-packaged info, which lowers the cost of info thereby increasing consumption

Question 14

Social Media

Answer 14

Not recognized disclosure method - too limited in space, promotional tone, no governance

Question 15

SM to comply

Answer 15

would need strong SM policy
train SM employees in disclosure obligations
coordinate timing w conventional comms channels
ensure balanced/accurate/consistent
protocols for 3rd party monitoring

Question 16

Forward looking information

Answer 16

info that projects expectations/performance - can be valuable but need to be realistic and based on accessible information. Utilize “safe harbour language” that discusses specific risk factors that could impact expected performance

Question 17

strat comms should care:

Answer 17

transparency contributes to trust/credibility, contributes to corporate narrative - uses plain language, disclosure practices, signalling/agenda building

Question 18

Quiet periods

Answer 18

time around end of quarter - before earnings have been announced - limit communication w financial community

Question 19

blackout periods

Answer 19

meant to reduce risk of insider trading - company insiders cannot buy/sell stock around time of quarterly earning reports

Question 20

Form 4 filings

Answer 20

SEC regulation that requires the disclosure of stock trading activities on a timely basis through SEC filing system –for companies that allow insiders to legally trade in their own stock

Question 21

insider trading

Answer 21

when company employees profit on material/non public info, or pass that information on to others who trade on that info - penalties = jail/fines/barred from profession

Question 22

Reg FD VIolation

Answer 22

when someone selectively discloses info to others

Question 23

nonverbal/verbal comms

Answer 23

most effective when combined/coordinated from the start

Question 24

information subsidies

Answer 24

prepacked materials that lower cost of information and increase consumption by stakeholders, influencers, journalists

Question 25

Form 8-K Filing

Answer 25

must be made for material event that occurs at public company between periodic reports - acquisitions, sale of assets, employee changeover, default on loan

Question 26

earnings conference calls

Answer 26

usually held each quarter by all US public companies - 60 minutes long, remarks from CEO/CFO regarding quarterly performance and Q&A session - media/competitors/stakeholders may dial into call and listen. Calls are usually then archived.

Question 27

Analyst/Investor Day:

Answer 27

most US public companies hold these on an annual basis - analysts/large investors meet with company executives to gain more sophisticated understanding of company strategy/future plans - can be a webcast

Question 28

Investment conferences:

Answer 28

sponsored by investment banks, attended by analysts/large investors, presentation done by company management team/investor relations professional

Question 29

Nondeal roadshows:

Answer 29

management team/investor relations professionals go on these duing the year, meeting with current/prospective investors in major cities. More private than conference appearances.

Question 30

Earnings guidance:

Answer 30

forecasts about future financial performance, provides stakeholders with insights into future, anticipated performance. Can lead to issues in trying to meet or exceed short-term performance metrics.

Question 31

Private Securities Litigation Reform Act (1995):

Answer 31

an attempt to limit frivolous lawsuits if SEC reporting company misses a previously released forecast.

Question 32

“Safe harbor Language”:

Answer 32

discussing company-specific risk factors that could impact its future expected performance - included at bottom of earnings release

Question 33

Plain english:

Answer 33

an important skill for strat comms - translating legalese into easily understood language for stakeholders