The persuasion from this spider web log came from the "Extra-Curricular Topics" I instruct inwards my MBA classes, a 10-minute interlude where I instruct an academic newspaper alongside pregnant real-world relevance. This expanded to an opt-in Google Group where I wrote to old students summarizing an interesting newspaper that I come upwardly across inwards a seminar or conference, as well as from at that topographic point came this blog. However, the get-go few spider web log posts ended upwardly beingness on dissimilar topics - this is the get-go postal service on the intended theme.
One really interesting newspaper I saw presented at the LBS external seminar serial is http://www.people.hbs.edu/cmalloy/pdffiles/malcolou.pdf by Lauren Cohen (HBS), Dong Lou (LSE), as well as Chris Malloy (HBS). It uses analyst conference calls to shape a trading strategy. After Regulation FD, firms are no longer allowed to expose data selectively to for certain groups of investors as well as non others, as well as then analyst conference calls are an of import agency inwards which they disseminate information. All analysts are allowed to participate.
However, what I didn’t know until I saw the talk, was that firms tin strength out select which analysts they would similar to speak as well as inquire questions inwards the meeting. Analysts tin strength out signal if they would similar to inquire a question, but the draw of piece of job solid has total discretion on which analysts to telephone phone upon. The newspaper shows that for certain firms volition selectively select optimistic analysts (i.e. those who laissez passer on them high ratings) as well as forestall pessimistic analysts from doing this. Such a strategy is bad inwards the long-run, because analysts that are non allowed to speak may halt upwardly dropping their coverage of the draw of piece of job solid (and analyst coverage is useful for boosting stock liquidity). However, myopic firms who are focused on boosting the short-term stock cost may engage inwards this strategy – indeed, these are firms that are only nearly to number equity (so they desire to prop upwardly the short-term stock price) as well as halt upwardly announcing earnings that only run into the earnings forecast or trounce it yesteryear 1 cent (suggesting they’ve done something myopic similar cutting R&D to run into the target).
The conference telephone phone data is world data which tin strength out hold upwardly used to shape a long-short strategy: sell the firms that engage inwards such manipulation as well as purchase the firms that don’t. This strategy earns 95 footing points per month, nearly 12% per year, which is huge alpha. The manipulating firms too halt upwardly having negative earnings announcements inwards the future, having to restate previously announced earnings (implying that the previous earnings were falsified), as well as using discretionary accounting accruals to artificially boost earnings. This newspaper is a bully lawsuit of using a clever institutional especial (the fact that it’s the draw of piece of job solid who gets to determine who speaks on a conference call) to detect an extremely profitable trading strategy.
You mightiness cry back - shouldn't the SEC ban companies from beingness allowed to selectively alternative as well as select who speaks? Well, truly there's a practiced argue for allowing companies this discretion. It allows them to halt Bruce Wayne from Wayne Enterprises from calling inwards (see p13 of http://dealbreaker.com/uploads/2013/05/ARCHER_OL-Transcript-2013-05-30T12_001.pdf).
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