pension fund perspective: the effect of society presentations on stock prices

CFA Institute

Pension Fund Perspective: The Effect of Society Presentations on Stock PricesAuthor(s): Patrick J. ReganSource: Financial Analysts Journal, Vol. 36, No. 3 (May - Jun., 1980), pp. 14-15+39Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4478338 .

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by Patrick J. Regan

BEA Associates, Inc.

The Effect of Society Presentations on Stock Prices As most readers are aware, the New York Society of Security Analysts (NYSSA) sponsors luncheon meetings at which chief executives of major cor- porations address society members. Analysts societies in other cities have similar gatherings, but with less market impact. Accounting for approximately one-third of the membership of the Fi- nancial Analysts Federation, the NYSSA is dominated by brokerage house analysts, whereas the other societies cater to the interests of "buy side" analysts working for local banks, insurance companies, fund manage- ment and investment counseling firms. Then, too, the leading financial publi- cations are headquartered in New York. For these reasons, company presentations at NYSSA luncheons can have a major effect on stock price.

NYSSA members have no doubt noticed that many of the companies making presentations this year are in the currently popular fields of energy and natural resources. Given the selec- tion procedure, this is not surprising. The NYSSA Program Committee main- tains an informal master list of companies in various industries, with rank- ings by sales and market capitalization. Selections are made on the basis of size, market, interest and length of time since previous appearance. No company may be invited more than once every two years, and most appear only once in every three years. Once a company has satisfied the size and fre- quency criteria, the most important criterion is market interest.

In most cases, the NYSSA Program Committee extends a formal invitation to the company's chief executive two months before the scheduled date, to allow the executive time to prepare his presentation. When the committee re- ceives a written acceptance, the company is added to the agenda. The calendar of events, which normally covers six weeks of programs, is mailed to members around the 20th of each month.

News of the presentations and the speeches themselves are widely dis- seminated at no charge. Barron's pub- lishes the weekly list of speakers in its "At the Analysts" section. After each speech (delivered between 12:45 and 1:30 PM) a press release is issued to the Reuters and Dow Jones news services.

In four out of five cases, highlights of the talk appear in The Wall Street Journal the following day. The complete text, including charts or slides, is printed in The Wall Street Transcript approximately three weeks later.

A Study of Effects The hypothesis that companies'

stock prices advance before their NYSSA presentations was first pro- posed, tested and confirmed by Merrill Lynch's Anna Merjos in a 1961 study that appeared in Barron's. 1 She examined the price behavior of the 124 companies that had made presentations before the NYSSA during the second and third quarters of 1961 and found that, while 63 per cent of the stocks advanced in the two-week period preceding the speech, only 41 per cent advanced in the two weeks following.

The reasons for this finding are fairly obvious. Since companies are only invited every two or three years, man- agements generally do not accept an invitation unless they have something positive to say about their companies. This, combined with the fact that the Program Committee tends to invite currently popular companies, almost ensures that the information transmitted at the presentation will be new and favorable. True to form, the analysts begin discounting this news as soon as they learn that a meeting is scheduled.

In 1971, Victor Niederhoffer and I studied the share price behavior of the 1,106 companies (excluding 283 not listed on exchanges and 147 electric utilities) whose stocks were listed on the American or New York Stock Ex- changes and whose chief executives made presentations before the NYSSA between 1964 and 1971.2 In the month before the speech, the 917 NYSE-listed issues outperformed the Standard & Poor's (S&P) 500 by two per cent, on average, gaining 1.6 per cent on the market in the final two weeks. By con- trast, these stocks exactly tracked the S&P 500 in the two weeks following the presentation, then outstripped the S&P 500 by nearly 0.5 per cent in the next two weeks, when research reports on them began to appear. The NYSSA presentations were clearly the turning

point, since the stocks outperformed the S&P 500 by 0.3 per cent the day before the meeting and by another 0.3 per cent the day of the meeting, but underperformed by 0.1 per cent the next day.

The 189 stocks listed on the Ameri- can Stock Exchange outperformed the S&P 500 by four per cent in the month preceding the NYSSA presentation, gaining 2.9 per cent on the market in the final two weeks. In the two weeks following the meeting, they underperformed the S&P by 1.2 per cent and even four weeks after the presentation were still 0.4 per cent behind the S&P.

Figure One illustrates the cumulative performance of the NYSE and Amex stocks relative to the S&P 500. The supposedly favorable news is dis- counted by the day of the speech, and the stocks peak after having outstripped the S&P for several weeks. Relative performance of the average stock accelerates in the final two days before presentation. The stock then typically lags the market for about two weeks, until the written research reports are compiled and distributed. T-tests on our results for nearly all the holding periods showed them to be statistically significant. In fact, there was only one chance in 10,000 that the observed differences between the results for the one-month, two-week and one-day holding periods preceding and following the presentations could have been as great as they were purely by chance.

Not surprisingly, NYSSA presentations lead to analysts' recommenda- tions. But because the companies invited to make presentations are large and generally popular, it is possible that a certain number would be recommended even if they hadn't made presentations. We turned the clock back one year to see how many research reports on the presentation companies appeared in The Wall Street Transcript. A little more than 16 per cent of the companies were written up one year and a month before their presentation dates, and 23 per cent were recommended in the following month. In the one month before the NYSSA presentations, 17 per cent were mentioned favorably in research reports, a random figure compared to a year earlier. But in the month following the speeches, a 1. Footnotes appear at the end of article.

FINANCIAL ANALYSTS JOURNAL I MAY-JUNE 1980 E 14



full 48 per cent were recommended, more than twice the figure of the previous year. Hence the research reports that begin to flow about two weeks after the presentation account for the rebound in performance plotted in Fig- ure One.

By analyzing the manner in which the speeches were presented and the types of information conveyed, we tried to identify which stocks were more likely to be mentioned in The Wall Street Journal the next day, to be recommended by analysts in the following month, and to outperform the S&P 500. Rather than read and categorize every speech, we took a sample of 229, including all presentations in the first quarter of 1964, the second quarter of 1965, etc. We were able to determine from The Wall Street Transcript who delivered the speech, how many executives spoke, whether or not audio/ visual methods (e.g., slides of charts or graphs and films) were used, whether the talk included a history of the company, a discussion of products and markets, a mention of capital expenditures or a reference to recent earnings or an earnings forecast. Table One summarizes our results.

The table indicates that 156 of the 229 companies analyzed sent only one per- son to address the NYSSA meeting, while 33 sent two and 40 used a team of three or more. While the results were mixed, use of one speaker boosted the probability of newspaper coverage from 81 to 82 per cent and increased the

likelihood that analysts would recommend the stock from 49 to 51 per cent. Most companies bring their top officers to sit on the dais and respond to questions, and some prefer to split the main presentation among three or more officers, so as to display depth of man- agement. This approach did increase the probability that the stock would

outperform the S&P 500 in the following month, from 45 to 50 per cent. But the differences in Table One were not statistically significant.

Investor relations people usually recommend the use of audio/visual aids. While these did increase the likelihood of Wall Street Journal coverage from 81 to 86 per cent, the com-

continued on page 39

Table One Information Content of NYSSA Speeches

Percentage of Cases No. of Received That Generated Beat the

Information Content Observations WSJ Coverage Research Reports S&P 500

No. of Speakers-one (156) 82% 51% 43% -two (33) 76 39 49 -three or more (40) 80 48 50

Used Audio/Visual Aids-yes (69) 86 38 41 -no (160) 79 54 47

Discussed Co. History -yes (38) 76 37 34 -no (191) 82 51 47

Discussed Products & Markets -yes (223) 80 48 45

-no (6) 100 100 33

Discussed Capital Expenditures -yes (94) 81 55 43

-no (135) 81 44 47

Discussed Earnings yes-specific forecast (41) 85 63 63 yes-no specific forecast (119) 82 50 43 no (69) 77 38 38

Average (229) 81 49 45

Figure One: Cumulative Relative Performance, Before and After NYSSA Speech

A L'? 189 Amex Stocks

0~~~~~~~~~~~~~~~~~~~~~~~~0 +3% -

4%*

c) / 917 NYSE Stocks

J +2%-0

c ~~~~~/J

> +1%- o

4 / E ot/ 0~~~~~~~~~11

U o Time Period

-One -Two Day of +Two +One Month Weeks Speech Weeks Month

FINANCIAL ANALYSTS JOURNAL / MAY-JUNE 1980 E 15



sion in the rate of return of the interest earned on the Treasury bills.

While we know that futures prices-hence the equity in an account - do fluctuate daily, we attempted to circumvent this problem by taking the average equity in the account during the three-month holding period and computing the Treasury bill interest earned on that amount using the 90-day rate prevailing at the start of the period. Our second measure of the rate of return on a futures contract is therefore:

1[( P Pt+Pt+i R2t = - (Pt+l-P) + Rft ( (3)

where P, is the futures price and Rft the 90-day Treasury bill rate at the start of quarter t. Note that if Pt+1 is close in value to Pt, R2t will be approximately equal to the sum of the propor- tional change in the futures price and the 90-day Treasury bill rate:

R2t Rlt + Rft (4)

There is an alternative, and perhaps more in- tuitively appealing, way to explain the derivation

of R2C. When an investor takes a long position in a futures contract, he promises to pay the current futures price at the end of the investment period rather than at the beginning. But this is equiva- lent to paying the present value of the current futures price-Pt/(1 +Rft)-at the beginning of the period. In that case, the rate of return would be measured as:

= Pt+l(l+Rft) 1 R2t = . -

Pt or equivalently:

R2t= (1+Rjt)(1+Rft) -1 . (5)

which is approximately equal to R1t+Rft. To summarize, one can compare rates of re-

turn on commodity futures with rates of return on stocks and bonds in two ways. One can either compare the simple rate of return on com- modities futures, Rlt, with the "risk premium" on stocks and bonds (the return in excess of the 90-day Treasury bill rate) or the rate of return including the interest earned on Treasury bills, R2c, with the rate of return on stocks or bonds as conventionally measured. We used both mea- sures for our study.

Pension Fund Perspective concluded from page 15

panies that did not use audio/visual aids had a significantly higher probability of having their stocks recommended (54 per cent, versus 38 per cent for those that did use such aids) and of outperforming the S&P 500 (47 per cent versus 41 per cent). Companies that do not use slides or films usually hand out packets of fact sheets and charts to the analysts, who then do not have to take as many notes.

As shown by Table One, the results on the information content were mixed. Perhaps it is not surprising that firms that omitted history from their presentations had a higher probability of getting Wall Street Journal coverage, of generating research reports and of outperforming the market. All but six firms discussed products and markets, so that was not even a variable. Nearly half covered capital expenditures; these presentations resulted in more research reports, but did not help stock performance.

Not surprisingly, the most important variable was the earnings forecast. Companies that gave specific earnings forecasts had the highest probability of

getting Wall Street Journal coverage (85 per cent versus 77 per cent for those who omitted earnings from the talk), generating research reports (63 per cent versus 38 per cent) and outperforming the S&P 500 (63 per cent versus 38 per cent). Those whose spokesmen discussed the directions of earnings change, but gave no specifics, fell somewhere in the middle.

When we checked the actual earnings for the fiscal year following the NYSSA presentations, we found that 88 per cent of the companies that gave specific forecasts registered earnings increases, as did 77 per cent of the firms that gave general forecasts and 65 per cent of the companies that did not dis- cuss earnings. Of the specific forecasts that called for moderate gains of 10 to 30 per cent, actual results exceeded the estimates three-quarters of the time. The odds were only 50-50 in the case of modest (one to 10 per cent) or very large (over 30 per cent) predicted gains; the companies that forecast flat or down earnings did much worse. Ap- parently analysts can get a good feeling for a company's outlook by manage- ment's willingness or reluctance to forecast earnings.

It may be, of course, that these pat-

tems have changed over the years since our study appeared. But judging from the attendance, format and questions at NYSSA meetings, as well as the research reports and stock price behavior around presentation dates, they prob- ably haven't. Analysts still assume that an upcoming presentation will produce good news, they still respond to favorable earnings forecasts, and they still recommend the stocks covered in the presentations. M

Footnotes

1. Anna Merjos, "'Lunch At The Analysts," Barron's, 9 October 1961, p. 5.

2. Victor Niederhoffer and Patrick J. Regan, "The Effect of Information Transmitted At the New York Society of Security Analysts on Stock Prices" (Paper presented at the Seminar on the Analysis of Security Prices, University of Chicago, November 11, 1971).

FINANCIAL ANALYSTS JOURNAL I MAY-JUNE 1980 O 39



pension fund perspective: the effect of society presentations on stock prices

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