As U.S. fund managers shift their investment focus to the long-term prospects of the international companies they follow instead of broad market movements, concern is rising regarding financial reporting issues and practices. In fact, fund managers in a survey completed by Broadgate Consultants, Inc. in July and August of 1999, say that lack of data greatly influences the choice of stocks to purchase for their portfolios.

Related Links

Overwhelmingly, U.S. market participants believe that there should be an immediate and concerted movement toward the development of international accounting standards. Over 87% of the fund managers surveyed say the International Accounting Standards Committee is the appropriate body to develop a global accounting system.

The fund managers, whose firms represent over $1.7 trillion of assets, also register strong preference for cash-oriented corporate performance measurements when evaluating companies, such as "cash" earnings per share.

About two-thirds of the portfolio managers surveyed say they value companies more on the basis of cash-EPS numbers, rather than regular EPS numbers, which include write-offs for goodwill and other charges. The broad acceptance of cash-earnings reporting follows recent proposals by U.S. accounting regulators to permit companies to include cash-earnings figures along with regular EPS numbers in their quarterly earnings announcements.

Further reflecting an increasing focus on company-by-company performance measures that better reflect economic reality, the survey respondents indicate solid support for the concept of economic value added, or EVA. Over half of the fund managers say that a non-U.S. company that has adopted EVA is a more attractive investment opportunity than a non-EVA company.

Incentive compensation disclosure, an issue that is closely linked to the EVA concept, is also considered increasingly vital in assessing the quality of corporate management. Ninety percent of the fund managers surveyed say information about executive incentive compensation is very important in evaluating investment opportunities. In that regard, respondents express dissatisfaction with the level of transparency about pay from the non-U.S. companies they follow. Fully 86% of those surveyed say non-U.S. companies provide inadequate disclosure about executive pay and incentives.

In the wake of several high-profile accounting scandals, U.S. market participants indicate they are concerned about deliberate efforts by corporate management to mislead investors through earnings-management practices. About one-third feel that non-U.S. companies are more likely to overstate earnings when they report results than their U.S. counterparts. Almost half the respondents feel that non-U.S. companies are equally likely to overstate financial results as their U.S. counterparts. Only 26% say they were less likely to overstate earnings.

Despite the growing use of cash-earnings figures and other less conventional measures to assess the health of public companies, respondents acknowledge that share prices are still greatly influenced by EPS estimates of sell-side analysts, but not necessarily those that are published in analyst reports. Nearly 60% of the respondents say that unpublished "whisper" estimates are more influential than officially published earnings estimates.

In terms of information access, the Internet appears to be having a dramatic effect on the way in which professional investors follow non-U.S. companies. Over two-thirds of the money managers surveyed say that the Internet is significantly changing the way they obtain information about investments. Almost 50% go so far as to monitor chat rooms for rumors and other insights about the companies in their portfolio.

Equally important is information regarding how companies are using the Internet to grow their businesses. U.S. fund managers expect substantially more disclosure from non-U.S. companies about their e-commerce strategies. Fewer than 10% of the respondents say that non-U.S. companies are effective in explaining their approaches to capitalize on industry e-commerce opportunities.

The earnings conference call continues to be an essential part of keeping U.S. investors informed. More than 80% of the respondents say it is one of the most important and efficient ways for companies to deliver information to the market. Nevertheless, reflecting a bias for one-on-one contact with corporate management, nearly two-thirds of the respondents say they prefer asking questions about results in private conversations rather than on conference calls.

Importantly, many respondents fear that members of the media who listen to the call might misinterpret any comments they make. As a result, 64% of the respondents indicate a preference for excluding the media from investor teleconferences. Only 3% of the sample expressed strong support for media participation, a finding that appears to contradict the growing trend of U.S. companies to allow media on live conference calls with analysts and institutional investors.

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE