Chapter 7 / Lecture 5 Flashcards
Transparency Benefits:
more liquidity (easier to access cash) and trust
better relationships, valuations, reputation
lower volatility (not riding market wave) and cost of capital (reserves)
selective disclosure
when select market participants get material/nonpublic info about public company ahead of broader market
Martha Stewart/ImClone
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
Enron
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
securities
financial instruments - represent financial value such as ownership interest in company (stocks), money borrowed that must be repaid (bonds
materiality
info that is substantially likely to be important to an investor when making investment decisions
1929 Stock Market Crash
insiders sold stocks en masse due to knowledge of failing business conditions - had unfair advantage, led to great depression
Securities Act 1933
oversees integrity of security markets, ensures investors receive timely/accurate/complete info before investing
Securities Regulation
SEC (US and many publicly traded companies)
Canadian Securities Administrators
Provincial Securities Regulators
Information Asymmetry
when one party has more/better access to info than other parties - insiders include executive officers, board members, large shareholders
disclosure theories
when one side of market believes the other has more/better info, mutually beneficial transactions/relationships are challenged
signalling theory
how/why market participants engage in costly/observable behaviours (ie signals) to reduce information asymmetry
agenda-building theory:
practice of sharing info as pre-packaged info, which lowers the cost of info thereby increasing consumption
Social Media
Not recognized disclosure method - too limited in space, promotional tone, no governance
SM to comply
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
Forward looking information
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
strat comms should care:
transparency contributes to trust/credibility, contributes to corporate narrative - uses plain language, disclosure practices, signalling/agenda building
Quiet periods
time around end of quarter - before earnings have been announced - limit communication w financial community
blackout periods
meant to reduce risk of insider trading - company insiders cannot buy/sell stock around time of quarterly earning reports
Form 4 filings
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
insider trading
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
Reg FD VIolation
when someone selectively discloses info to others
nonverbal/verbal comms
most effective when combined/coordinated from the start
information subsidies
prepacked materials that lower cost of information and increase consumption by stakeholders, influencers, journalists
