biz.yahoo.com
Friday August 31, 6:21 pm Eastern Time
Companies tempted to mislead investors -study
(UPDATE: Recasts, updates. New byline, new dateline, previously WASHINGTON)
By Glenn Somerville
JACKSON HOLE, Wyo., Aug 31 (Reuters) - Corporate managers have more reasons to mislead financial markets as stock options become a bigger part of pay, and the quality of information to investors is deteriorating, a study presented to a top-level meeting of central bankers and academics warned on Friday.
Harvard University Professor Andrei Shleifer told Federal Reserve Chairman Alan Greenspan and other senior policymakers and bankers from around the world that high-technology companies that often have no profits have aggravated the problem.
High stock prices help such new companies make deals and attract employees, Shleifer told those attending a symposium organized by the Kansas City Federal Reserve Bank. He added that stricter regulation may be needed to ensure corporate statements are based on sound accounting procedures.
ALL STOCK, NO PROFITS
``A high current stock price makes it cheaper to pay employees with stock, to raise funds through share issues and to make acquisitions,'' Shleifer said. ``For a number of reasons, the need to maintain a high equity price has been growing with technology-induced changes in financial markets.''
The symposium to assess developments in the New Economy was the Kansas City Fed's annual gathering at a rustic Rocky Mountain resort that draws participants from around the world.
Shleifer also warned that a growing number of small investors know less than they think they do because they rely on a flood of investment information -- some of it questionable -- from sources including television.
``The growing abundance of information available to unsophisticated investors is likely to have created, in their minds, an illusion of knowledge,'' he said, making them the more susceptible to misleading corporate presentations.
That conclusion was disputed by Federal Reserve Vice Chairman Roger Ferguson.
'PERIOD OF OPTIMISM'
In in a response to Shleifer's presentation, Ferguson, said the late 1990s were ``a period of optimism about the prospects for the U.S. economy'' that made people more willing to take on risk after a long period of rising stock prices dating to the 1980s.
``In this environment, many investors -- not merely newcomers -- purchased stock on the belief that business plans would become reality. The problem was not, for the most part, that new investors came to dominate the market but that many investors' attitudes toward and perception of risk changed markedly,'' he said.
Ferguson agreed with calls for clearer corporate disclosure and improved investor education but said the Fed had not found evidence that stock owners as a group were becoming les informed.
The Fed's own data showed a growing proportion of individuals holding stock, mutual funds or other similar professionally managed investments, he said.
``Households have been handing over more and more of their equity portfolios to professional managers, who tend to be relatively well-informed investors,'' he said.
The Fed conference occurred against a background of slowing U.S. economic growth and underwater stock prices of technology companies that once pushed the NASDAQ composite index's value to more than twice its current level.
Earlier on Friday, former Treasury Secretary Lawrence Summers presented a paper in which he suggested the technology revolution will produce long-term productivity gains but that investors in such companies should expect lean times.
``The future of the technology is bright; the future of the profit margins of businesses -- save for those few that truly are able to use economies of scale to create mammoth cost advantages -- is dim,'' said the paper prepared by Summers and Bradford DeLong, a professor at the University of California at Berkeley.
``Consumers will gain and shareholders will lose,'' the paper said. ``Those products that can be competitively supplied will be at very low margins.''
KJC |
