Board-Ansicht
Mix-Ansicht- Inefficient Market: Misinforming Mr. Market - leibovitz, 13.12.2001, 17:37
Inefficient Market: Misinforming Mr. Market
Inefficient Market: Misinforming Mr. Market
Inefficient Market: By Edward Chancellor
An efficient market requires timely information. Financial public relations firms assist their clients in the dissemination of news. In principle, therefore, they are a good thing. However, the PR industry now feels threatened by new powers bestowed on the UK’s Financial Services Authority. Leading figures in the PR world fear that the FSA will clamp down on their industry practices, thereby causing information to dry up.
Much financial PR is not far from puffery. During the tech boom, companies were desperately fighting for their share of ‘mindspace’. An incessant newsflow emerged, encouraged by the almost limitless column inches devoted to the ‘new e-conomy’. Internet companies gained credibility by providing a steady flow of news. For instance, Baltimore Technologies, the Irish internet software company, issued roughly 10 press releases a month during the bubble phase. The incessant supply of news releases created the impression of dynamism in a vast potential market, serving to propel the share price upwards.
In retrospect, much of the information bandied around during the boom was simply noise, which served to divert investors’ attention from the genuine weaknesses of the tech companies. It is difficult to draw a line between keen financial PR and old-fashioned stock promotion, where individuals are paid to drive up share prices. Given the enthusiasm with which the information revolution was greeted, no financial regulator could have censored the excited talk of the time. Nor can the regulators ensure that market price and intrinsic value are one and the same.
However, ever since a man rode down the City Road in 1714 declaring loudly (and wrongly) that Queen Anne was dead, the guardians of the stock market have been vigilant against the dissemination of false news. The powers of the Financial Services Authority have recently extended to cover the activities of PR world, which up till recently has been relatively free of regulation.
Now, just about anything said by a flak potentially comes under the jurisdiction of the regulator. If the PR company puts out a release by a client, it has a duty to make sure the information is accurate (in the past, only the company was responsible). If a journalist rings up for confirmation of a story, the flak may find himself legally at fault for either supplying or withholding relevant information. The penalties for so-called ‘market abuse’ include limitless fines, on both firms and individuals, imposed by the FSA itself.
The reaction of PR professionals to the new regulation is mixed. The insouciant PRs respond - off the record - that their activities are so informal that they would be impossible to catch. The neurotic, having spent too much time with their lawyers, fear that the only safe reply in future to a journalistic enquiry is ‘no comment’, which rather negates their purpose in life. They claim that they will no longer be able to brief journalists on deals, prior to announcements, under conditions of strict embargo. They also suggest that they will no longer be able to guide journalists when their stories contain certain inaccuracies. The management of a breaking story will slip from their hands. Companies’ internal public relations, their financial advisers and brokers will also clam up for fear of the new rules. As a result, the market will be starved of accurate information, while more inaccurate stuff appears uncorrected in the press.
In fact, this doom-laden vision appears somewhat exaggerated. The FSA - not an institution particularly adept at handling its own relations with the press - has started to backtrack. Recently, its chairman, Sir Howard Davies, claimed that PR companies must ‘clean up their act’. He talked ominously about getting his first ‘scalps’ in the PR world. Now, the FSA is smoothing ruffled feathers. The new legislation, it says, is not intended to regulate PR. Flaks can still brief journalists in advance of news announcements. The new market abuse rules, it maintains, are mostly an extension of the old listing rules and laws against spreading false rumours. There is nothing wrong with the PR world and the FSA doesn’t wish to change anything.
It is most likely that the current fuss will blow over. This is right. Regulators should interfere as little as possible with the dissemination of financial information. Caveat emptor should be a sufficient warning to investors. However, there may be grounds for regulatory intervention when the suppliers of information have an institutional bias towards inaccuracy. Brokerage research departments are subsidised by the investment banks. As we all know, they are reluctant to offend their employer’s corporate finance clients.
The failure of most analysts to anticipate problems at Enron, a big spender on Wall Street, is further confirmation of the problems arising from the lamentable conflict of interest within investment banks. When Enron’s former chief executive, Jeff Skilling, was faced with a negative brokerage report he would typically respond by saying that the analyst must have been miffed at not receiving his firm’s investment-banking business. In comparison to the problems besetting the investment-bank research issue, the puffery of financial PRs - which face no such conflicts of interest - counts for little. The FSA would do well to realise this.
Author: Edward Chancellor
http://www.breakingviews.com/ve.asp?sid=3472&aid=5376&lid=3
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