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How real is positive news?

Managing positive news

Monday, November 10, 2014 - 11:30

In today's Business Times, I featured an academic study which found that chief executives systematically release positive news around the periods when they can exercise their share options. When the share prices rise in response to the news, the options are duly exercised and the shares then sold for a profit. Is this behaviour to be frowned upon? Maybe - you could argue that top management should be above this sort of thing, that  news should be released as when it developments materialise and not managed so as to maximise personal gain. However, that CEOs indulge in this kind of timing probably shouldn't come as a big surprise - CEOs are human and therefore prone to the same greed impulses as anyone else. But what if the seemingly positive news isn't really positive? Or to go even further, what if the news isn't real in the first place?

I often wonder about the veracity of prominent corporate announcements involving large, eye-catching figures, particularly when the deals are called off later. Were these for real or were they merely inventions of active corporate imaginations with no substance that were aimed at driving up stock prices?

Many years ago for instance, investors were presented with a flurry of profit-guaranteed deals. I found these announcements to be so far-fetched that they beggared belief - who after all, can realistically guarantee profits years into the future? Sure enough, none of them materialised, there was always some small technicality that wasn't met, or some detail that caused the deals to fall through. Did anyone check that the original agreements were bona fide to begin with? Some market observers have said that it doesn't matter if such annoucements were real, they at least gave the market something to trade on and generated excitement. And who cares if they never lead to anything - the game is all about getting in and out as quickly as possible. Since the stocks involved ran up and people made money, then best to leave things alone since the system is working well. It's a very mercenary way of thinking but realistic nonetheless. It comes back to an earlier blog posting of mine about just how much hypocrisy there is in the stock market - if everyone knows that incredibly positive announcements won't lead to anything, then it's OK because everyone starts on the same footing. Would you agree? Is that really what caveat emptor is supposed to mean?