- Here’s a different take on the “revolving door” concept that we hadn’t seen before, but makes a lot of sense intuitively. University of Chicago researchers, working with a dataset of ratings agency credit analysts, uncovered the data that supports a hidden incentive for investment banks to hire former ratings analysts. Banks do appear more likely to hire analysts that are more accurate in their ratings, but in general are more likely to hire analysts that covered deals the bank was associated with. Further, a full 27% of the credit analysts cited wound up working for one of the top banks, and 13% wound up working for banks that were associated with a deal they had worked on. The researchers are working with a structured finance data set (ABS, MBS, CDOs, etc.), so the results aren’t strictly relevant to corporate-issued debt…but the concept applies to corporates as well – there does appear to be a natural talent pipeline from credit ratings analysts into banks, and this might have some interesting implications for your relationship with both. (Ratings agencies, are, of course, exempt from Reg FD, and while there are certainly ethics rules that prevent individuals from rating agencies from using information they acquired from non-public sources, well, let’s just say it may be worth watching the career paths of those with knowledge of your company).
- With earnings season upon us and IR teams deep in the throes of assembling the next quarterly release, we thought this academic piece from UCLA Law School researchers, 'Do the Securities Laws Promote Short-Termism?' is an interesting respite for IROs wondering why they’re going through this in-depth a process each quarter. The article covers the entire history arc of earnings releases, guidance, broker estimates, consensus, and securities litigation starting from the 1960s, when companies first started producing quarterly reporting for investors. To summarize, the market has always, and will always, rely on some type of forward projection of companies’ results, whether it’s provided by the company or by the analyst community. The article covers several thought exercises as to how securities laws could be written to make sure companies are judged to the right standard in both short-term and long-term, including outright banning guidance (making the consensus less accurate and less valuable), encouraging more and better-defined guidance (making the consensus more accurate, but less valuable), and requiring companies to have a “duty to correct” projections (making projections and consensus both more accurate by opening up liability). For any that have had the “should we guide to X” debate internally, these questions underly any decisions the company makes.