IR Monitor – 2 October 2024

In this week’s newsletter:

• Investors are spooked by the threat of a nightmare on AIM street. The prospect of the Labour government removing a vital tax relief in its October budget has led to fears of a share sell-off in the UK’s junior market, according to The Times
• IR Magazine explains how to rebuild investor trust after an earnings miss
• The IPO Market will take a slow road to recovery, suggests the Financial Times
• A Harvard Business Review study finds that AI can mostly outperform human CEOs. If AI can help companies maximise shareholder value more effectively, why resist?
• Reuters on the danger of skimpy financial disclosures
• And finally … Do buy-side analysts manipulate stock prices on earnings conference calls?

This week’s news

Nightmare on AIM street – The Times 

With Labour’s first budget in 15 years on the horizon, investors are fearful that the Treasury will remove the inheritance tax relief on offer for those who have owned shares in Alternative Investment Market (AIM) listed companies for more than two years. Alex Ralph from The Times writes that The Institute for Fiscal Studies has predicted that removing the tax relief could potentially raise £1.1 billion for the Treasury, an amount which could rise to £1.6 billion between 2029 and 2030. However, the article argues that these figures fail to consider potential effects on AIM listed companies and the market. Having benefitted from business relief since its conception in 1995, the functioning of the AIM without it remains highly uncertain, leaving investors fearful for the unintended consequences of the eerie 30th of October budget. In a time where the new government yearns for private sector investment for Britain’s economic growth, could the new government be shooting one of its star players in the foot?

Rebuilding investor trust after a miss 

Following immediate mitigation, the next step in navigating the choppy waters of a consensus miss is to attempt to reinstate the trust with the most loyal shareholders. Noemi Distefano of IR Magazine maps out their four-stage plan to restore credibility in such a situation. Stage one is to identify the mistakes made and to share how the company intends to fix them in a simple, honest manner. Step two sees the company boosting its corporate access efforts, reaching out to investors who are interested in buying on the dips and with volatility a potential aid to diversify the shareholder base. Thirdly, it is vital not to act as if nothing happened. Addressing the issue head-on with both new and current investors asserts confidence in the company’s recovery strategy going forward. Finally, engaging in proactive comms ensures that all relevant stakeholders are aware of the situation, the company’s next steps and can help to manage emotions when the stakes are high. The blueprint is here, all you need is to execute.

The IPO Market will take a slow road to recovery – the Lex column

The Financial Times reflects on the possibilities of IPOs for the rest of 2024 with glum prospects. With the US presidential elections pending, it seems unlikely that executives will be willing to roll the dice in the latter part of the year. Despite an improvement on the past two years, with $26bn raised so far in 2024 in NY compared to $20bn in 2023 and $8bn in 2022, eliminating recency bias shows that this figure was raised every six months before the 2020-2021 boom. Certain IPO oracles believe that 2025 will be a booming year of prosperity for those companies wishing to become publicly traded; however, the FT believes it is predictability, a precious and rare commodity in today’s landscape, as opposed to simply successful markets, that is needed to turn the tide. The progress is linear but not yet exponential. The IPO market is healing, just not at the pace companies would hope for.

Can AI outperform human CEOs and maximise shareholder value?

Seeking to explore the potential role of Artificial Intelligence in C-suite leadership, the Harvard Business Review conducted a 5-month global experiment that simulated various decisions that CEOs face to 344 human players & GPT-4o, Open AI’s LLM. Participants navigated rounds of gamified simulation that had over 500,000 decision combinations, aiming to survive as long as possible to increase market cap without being fired by a ‘virtual board’. GPT-4o significantly outperformed the top human participants, including the top 2 senior executives, on data driven tasks, market optimisation, product design, and profitability. However, GPT-4o was fired at a faster rate than human participants, as its more aggressive strategies proved weaker in responding to disruptive events that required longer-term human foresight and intuition. The outcomes of the experiment outline the opportunities and limitations of integrating AI into C-suite corporate strategy. The rise of ‘artificial CEOs’ could be harnessed to optimise data-heavy processes, leaving human CEOs to focus on longer-term, ethical decision-making, areas in which humans continue to outperform.

Less is less: Reuters on the danger of skimpy financial disclosures 

Jeffrey Goldfarb of Reuters writes that listed firms who report more vaguely on their financial disclosures and obscure key metrics have long caused problems for investors seeking to understand company performance beyond the lump-sum metrics of ‘revenue’ and ‘sales’. 8 out of 10 investors polled by the CFA Institute expressed dissatisfaction at how much information is currently made available on financial disclosures. Now, the Financial Accounting Standards Board (FASB), the private U.S. body that oversees domestic and international accounting standards, is set to establish new guidelines that will come into play by 2027 to counter companies’ ambiguous disclosures of their financial performance. The new guidelines are expected to enforce quarterly reporting of disaggregated expenses at a more granular level, such as inventory purchases, employee pay and depreciation of intangible assets. The proposals to hold companies to more rigorous standards of financial reporting are expected to come at a relief to investors and to have significant implications on market transparency, stock valuations, and capital flows.   

And finally… Do buy side analysts manipulate stock prices on earnings calls? 

The Harvard Law School Forum on Corporate Governance recently investigated whether buy side participants deliberately seek to influence stock prices by making negative or positive comments on earnings calls. Over 10,900 call transcripts were combined with the daily trade executions of the firms and broker-dealers that employed the analysts on call. Controlling for other variables such as quarterly performance, company news, analysts’ absences from calls, and dialogue with sell-side analysts, the research detected notable trading patterns that were consistent with ‘stock influence’ behaviour in analysts. Of the bodies more likely to act on ulterior motives were hedge funds and transient investment institutions. The landmark study, the first to be made from large-scale archival data, offers striking insights for regulators, companies and market participants who engage in earnings calls.  

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