Nest up is a more arcane note in the FT on how some dastardly CEOs and CFOs are coming up with elaborate hand signals to pass financial information to their pet analysts to defeat new legislation on insider trading:US executives have been able to secure more favourable research ratings for their companies from investment banks by bestowing professional favours on Wall Street analysts, according to new academic research to be published on Friday.
The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.
The unprecedented research, carried out on some 1,800 equity analysts and hundreds of executives, suggests that the radical regulatory reforms of the past few years have failed fully to eradicate conflicts of interests on Wall Street.
“Favour-rendering to analysts is evidently widespread and . . . it seems to be compromising the value of the guidance these experts provide to investors,” said Michael Clement of University of Texas, who co-authored the study with James Westphal of University of Michigan.
Analysts’ representatives said that accepting favours such as those described in the study – which also include putting analysts in touch with executives at other companies and advising on personal matters – was unethical.
“Activities such as these are in clear breach of our code of conducts and standards. Analysts should guard against both actual conflicts and the perception of conflicts,” said Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers.
But, according to the study, conducted between 2001 and 2003 and to be presented to next month’s annual meeting of the US Academy of Management, nearly four out of six Wall Street analysts admitted receiving favours from company executives.
The frequency of favours increased in line with the shortfall between the company’s earnings and market expectations – a crucial determinant of analysts’ stock ratings.
The favours were instrumental in securing better treatment from analysts. Analysts who received two favours were 50 per cent less likely than colleagues to downgrade the company after poor results, the academics say.
The most popular favour, mentioned by nearly a third of respondents, was putting an analyst in touch with an executive at a rival firm, followed by the offer of career advice, and agreeing to meet with the analysts’ clients.
Southern Europeans have long had a reputation for accompanying their talk with theatrical hand gestures. But Italian and Spanish chatterboxes could be facing competition from an unlikely quarter: US corporate executives.
Wall Street observers say there is anecdotal evidence that some chief executives and chief financial officers have begun using coded hand movements to pass on additional financial information to particular analysts.
The trick, akin to the covert advice given to tennis players from coaches in the stands – and just as illegal – could be designed to get round a ban on the selective disclosure of price-sensitive information to “favoured” analysts.
Known as Regulation FD – for “fair disclosure” – the rule was introduced seven years ago by the Securities and Exchange Commission to clamp down on insider trading.
“We have heard of the use of hand signals and gestures to get round Reg FD,” says Kurth Schacht, director of the Center for Financial Market Integrity at the CFA Institute, the professional body for analysts. Mr Schacht declined to name specific instances. But if he is right, regulators will soon have to police the hands, as well as the lips, of corporate executives.
