Management’s tales and quarterly earnings

Markets tend to be sceptical about good news, which partially explains the muted reaction to this quarter’s positive earnings numbers. Bad news, on the other hand, is considered far more credible

As earnings season in the US winds down, investors might be feeling rather optimistic. It seems that companies, especially US multinationals, have again exceeded expectations. Over 79% of them have posted earnings per share that beat analysts’ forecasts. This is an exceptionally high number of ‘beats’. It is on a par with the record set for the third quarter of 2009. It is also far better than the average ‘beats’. In a typical earnings season over the past 20 years just 62% of companies exceed analysts’ predictions. The question is why?
It is easy to understand why companies would beat expectations in 2009. The global economy was just beginning to recover from the disaster that started in the fall of 2008. The financial community was reeling from a brush with catastrophe. It is reasonable to expect cautious forecasts. The present number might be harder to explain.
One possible reason was that the pre-earning guidance provided by companies in the first quarter was very negative. Companies cutting their guidance outnumbered companies increasing it by two to one. The last time this happened again was in 2009, but in the first quarter when the global economy was falling apart. With companies issuing negative signals, the low estimates were predictable.
With such distortions we might suspect that managers were intentionally massaging their guidance. Certainly they have large economic incentives to do so. Convincing the market that the company is doing better than anticipated often results in a rise of the stock. Since many executives are also compensated in stock, a bit of a boost never hurts provided that the market actually believes you. This season it was more sceptical. Exceeding analysts’ estimates usually results in a 1% rise in share prices. This time stocks only rose 0.5% for a ‘beat’.
One of the economic incentives to manipulating expectation is not so much to create dramatic surprises, but to create a sense of stability. According to a recent survey, 96.9% of CFOs (chief financial officers) prefer a smooth earnings path. A nice earnings graph without spikes or troughs can mean less perceived risk which translates into lower costs for capital, better credit ratings and more credibility with investors.
This is especially true for firms which can present earnings as exhibiting a pattern of consistent earnings growth. The core competency of Jack Welch, the former CEO (chief executive officer) of GE, was manipulating earnings. His reputation and fame are based on his skill at being able to ‘manage’ quarterly earnings. He was able to deliver 15% earnings growth every quarter for many years.  Not only did he deliver consistent growth but also managed to slightly exceed expectations.
Corporate guidance is a perfect example of asymmetric information. Management has it and you don’t. So one of the ways that quality corporations can increase their value is to signal their ability to consistently forecast and achieve growth. This increases their reputation relative to competitors and other players. Companies with the best reputations, for example those on Fortune’s America’s Most Admired Companies list, are more likely issue more frequent and more precise forecasts than do other companies. The most admired company, Apple Inc, has missed estimates only once since 2007.
The credibility of guidance depends not only on the reputation of the company but also upon the type of news itself. Good news is treated by the markets quite differently from bad news. Markets tend to be sceptical about good news, which partially explains the muted reaction to this quarter’s positive earnings numbers. Apparently the market suspects management’s motives.
Bad news, on the other hand, is considered far more credible and the market has a much greater reaction. Although the likely credibility is equal for both types of news, bad news can push a company’s stock down by as much as 10%. Since the management realizes that bad news has a greater potential to spark a selloff, the incentives are greater to err on the upside when releasing a negative forecast. Perhaps the greater reaction to bad news has more to do the cognitive bias of loss aversion which is people’s tendency to strongly prefer avoiding losses probably twice as much to acquiring gains.
Reducing asymmetry with better disclosure varies a great deal throughout the world depending on the local regulatory regime. Foreign companies listing in New York through ADRs often will voluntarily disclose to increase their reputation. Interestingly disclosure from some companies from the emerging markets of Brazil and India will disclose more than companies from more developed countries. Firms from Denmark, Finland, Greece, Hong Kong, Japan, South Korea, Portugal, and Spain, do not issue any guidance. Firms from Israel, India, Norway, Singapore, and the Philippines issued both more often and more accurate.
Perhaps the inaccuracy of companies’ guidance last quarter has less to do with motives than the world economy, which due to massive interference by unpredictable governments, is far simply harder to predict.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).


Equity Mutual Funds: Lowest sales in the last three years in April 2012

After a month of marginal net inflow, equity mutual funds suffer an exodus of Rs615 crore in April

The sales of equity mutual funds may have peaked in March 2012 reaching a high of Rs4,925 crore, however, in the following month sales just reached Rs2,903 crore, the lowest in the last 36 months, according to Association of Mutual Funds in India (AMFI) data that is released every month. Moneylife had pointed out the declining trend in sales from August last year, but this trend was broken in the months of February and March mainly due to inflows from Equity Linked Savings Schemes (ELSS). Fund flows into these schemes usually peak in the last few months of the financial year for last minute tax saving reasons. Sales of ELSSs amounted to Rs151 crore in April, one-fourth of the sales in the previous month. Therefore, without the rush of funds into these tax-saving schemes, equity sales have fallen again. 

Redemptions were lower compared to the last couple of months but still, due the poor sales there was an outflow of Rs615 crore from equity funds. New Fund Offers (NFOs) seem to have dried up, as well. As a strategy, fund houses usually launch NFOs when the market is consistently rising. With in a downtrend, asset management companies are hesitant to launch NFOs. Apart from one ELSS scheme launched last month, there were no other new schemes launched in the last two months. As per AMFI data, numbers of equity folios as of March 2012 have declined by 4% over the course of one year, working out to 15.76 lakh accounts.

Securities and Exchange Board of India (SEBI) chief, UK Sinha, said that positive net inflows in FY2011-12 are an "encouraging development". However, in the same period there was a 25% drop in sales. According to the AMFI data, the financial year 2011-12 saw a net inflow of Rs122 crore, and FY2010-11 saw an exodus of Rs13,139 crore. But if we compare sales alone, in FY2011-12 sales declined by almost 25% to Rs50,560 crore from Rs66,592 crore in FY2010-11. Redemptions reduced by nearly 58% from Rs79,731 crore in FY2010-11 to Rs50,497 crore in FY2011-12. Therefore lower sales matched much lower redemptions leading to a positive net inflow.

Redemption is partly based on the investors' requirement. When he needs his funds he would withdraw depending on his investing horizon, his goal and the performance of the fund.

However, if sales fall, there is a serious problem despite positive net inflows. With lower sales there is a decline in new fund inflow and here is where the regulator has to step in. Entry load was banned in August 2009 and from the chart one can see there has been a steady decline since then. Except for the drop in sales in 2008, due to poor market conditions, sales failed to pick up and reach the levels of the earlier periods. In the 33 months post the ban, from Aug-09 to Apr-12, monthly sales averaged Rs4,920 crore per month, a drop of 28.54% compared to the sales in the 33 months (Nov-06 to Jul-09) prior to the ban, during which the average sales per month worked out to Rs6,885 crore per month.

With no incentive to sell mutual funds and the flat market conditions has made it even more difficult for the distributors to push mutual funds in the recent few months. SEBI is said to have set up a panel for the purpose of enhancing the reach of the mutual fund industry. With unclear incentive structure, the distributors would not find it feasible to reach investors in small towns and cities. What they need to come up with is a strategy that will benefit both the distributor and the investor.


Life Exclusive
“Mere paas Maa nahin, Mom hai”

In today's Bollywood or in Hindi movies, ‘Maa’ has become a pass(e) and (glam) Mom is the word. Mothers in a majority of Hindi films today are either filthy rich or very poor, leaving no space for family dramas and the middle-class

Gone are the days when the on-screen mothers in Bollywood would sing lullabies in their soft voices, those pain-filled eyes reflecting their sacrifices, their adoring smile and strokes that soothed away fears, their all-encompassing equation with their on-screen sons.

From "Mother India" (1957) to "Vicky Donor" (2012), the portrayal of on-screen mothers have changed over a period of time with the 'Maa" of yesteryear becoming 'Mom' today.

Then, no story was complete without them but today those roles have become mostly clichéd. Now, in most films, mothers have become marginalised, they are mere props instead of propelling the story.

"There is less importance of mothers in films today. Even if there are roles for mother, there is hardly anything for them to do on screen. Things have changed, there is hero and heroine for everything, so there is no need of mother," Zarina Wahab, who essayed the role of a mother to Shahrukh Khan in Karan Johar's "My Name is Khan" and Hrithik Roshan in the remake version of "Agneepath", told PTI.

"The kind of emotions and sentiments that is attached with the character of a mother is not there in today's films. I am happy that after a long time I got to do a film like 'Agneepath' (remake one)," she said.

Can anyone forget actor Shashi Kapoor's famous dialogue as a cop, "Mere paas maa hai", to his smuggler brother Amitabh Bachchan in "Deewar", where Nirupa Roy was the mother. She became the most epitomised on-screen mother in Bollywood history.

Nargis played a fiery single mother in Mehboob Khan's "Mother India", who brings up her two sons, Rajendra Kumar and Sunil Dutt. Nargis does not hesitate to fire a bullet at her criminal son, Sunil Dutt.

Leela Chitnis created the archetype of Hindi cinema mother, as she often played an ailing mother or one going through hardships and struggle. She played the mother of leading men, including the legendary Dilip Kumar.

Then we had Waheeda Rehman in Yash Chopra's "Trishul", Dina Pathak in Hrishikesh Mukherjee's "Khubsoorat', Raakhee in Ramesh Sippy's "Shakti'", Nirupa Roy in Manmohan Desai's "Amar Akbar Anthony".

Then came a new set of mothers-Rajshri Movies' favorite maa, Reema Lagoo in "Maine Pyaar Kiya", "Hum Aapke Hai Kaun" and "Hum Saath Saath Hai", the cutest maa-Farida Jalal in "Dilwale Dulhaniya Le Jayege" and "Kuch Kuch Hota Hai", the glamorous maa-Kirron Kher in films like "Veer Zaara", "Kabhi Alvida Na Kehna' and "Dostana", Zarina founded a new image of an on-screen mother by the donning the roles in "My Name is Khan", "Rakhta Charitra" and the latest "Agneepath".

"Times have changed and so have the role of mothers in Bollywood. As films reflect society, the portrayal of mothers has become more westernised like in terms of clothes. There are not much family drama movies today-either we have a filthy-rich mother or a mother from Dharavi (a slum locality in metropolitan Mumbai). Where is the middle class mother who goes through struggle, pain?" asked Reema Lagoo, who has played the on-screen mother to Salman Khan, Madhuri Dixit, Sanjay Dutt ("Vaastav") and Shahrukh Khan ("Yes Boss").

"I feel mothers have merely become a prop today... there is hardly anything for them to do on screen. I miss playing the kind of roles I did earlier," she said.

How can one forget the drinking mother, Dolly Ahluwalia, in "Vicky Donor". She played the mother to Ayushman Khurana and had the audiences in splits with her act.

In "Vicky Donor", the scene between Dolly and her mother-in-law (Kamlesh Gill) sharing a drink has become the most talked about act of the film released last month.

Dolly has admitted she had apprehensions about the audience accepting the saas-bahu's drinking sessions. "To our good fortune, our bonding, including the drinking part, has been liked," Dolly has said.




5 years ago

A very good article. Just wait for 15 more years and wife-husband relationship will be replaced with live-in patrners., son-father relationship with business partners, daughter-mom relationship with friends. I would like the team to opine as to what shall be student-teacher relatioship, employee-employer relations and others.

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