Shareholders getting more information
BY ADAM LASHINSKY
Mercury News Staff Writer
''Knowledge is good''
Inscription on the base of a statue at Faber College, fictional setting for the 1978 film ''Animal House'' starring John Belushi.
Financial markets need less convincing than the members of Delta House that information is a good thing. After all, efficient markets thrive on knowledge. Less certain is what's the right amount of disclosure in a world where plaintiff lawyers are as eager as campus pranksters.
Karen K. Nelson, an assistant professor of economics at Stanford University's graduate school of business, has an answer: More disclosure is good. And more to the point, companies are getting better at dispensing it.
According to a new study by Nelson and two colleagues, publicly held computer, software and drug companies are giving their shareholders more detailed information since the passage of the federal Securities Litigation Reform Act of 1995.
That law was intended to make it more difficult for shareholders to file frivolous lawsuits against companies when their stocks drop. By bolstering the walls of the ''safe harbor'' of accepted disclosure laws, public companies can make so-called forward-looking statements about their projected performance so long as the predictions are couched with proper disclaimers about risks.
According to Nelson's recently released survey of statements by 547 high-tech companies, executives are giving more detailed information, making more long-term guesses about good news and increased short-term disclosures of bad news.
What's more, Nelson says companies aren't using the new law as a ''license to lie.''
''We don't find any evidence at all that they're more biased than they were before the Reform Act,'' she says.
Nelson and her co-authors, Ron Kasznik of Stanford and Marilyn Johnson of the University of Michigan, measure truthfulness by comparing forecasts with actual results. They say company projections have become somewhat less accurate, but that's because the time horizons of the estimates have expanded.
Top officials at the Securities and Exchange Commission are likely to pay careful attention to the Stanford study. The SEC has been critical of the value and reliability of forward-looking statements. But it's based its criticism on anecdotal rather than empirical evidence, which the Stanford study supplied.
Investors can take comfort in the findings but shouldn't get carried away. Information may be good, but so is the ability to punish company officers who abuse the securities laws that protect investors.
It's unclear, however, if the landmark law is having its intended effect of reducing securities litigation.
Federal lawsuits dropped dramatically in 1996, with 110 companies becoming targets, compared with a range of 150 to 220 in the five years before the law took effect, according to Michael Perino, a lecturer at Stanford's law school.
But plaintiff lawyers filed suits against 170 companies in federal court last year, Perino says. And state suits overall have picked up since the federal law took effect, although they declined slightly in 1997.
''It's early in the life history of the act,'' Perino says. ''In many cases, it's too soon to tell.''
But anecdotally, lawyers aren't letting the law change get in the way of litigating. A sample of high-tech companies who've been sued recently includes Ascend Communications Inc. (Nasdaq, ASND), 3Com Corp. (Nasdaq, COMS), Spectrian Corp. (Nasdaq, SPCT), Oracle Corp. (Nasdaq, ORCL), Sybase Inc. (Nasdaq, SYBS), Electronics for Imaging Inc. (Nasdaq, EFII) and Silicon Graphics Inc. (NYSE, SGI).
''It's getting worse,'' says T.J. Rodgers, CEO of Cypress Semiconductor Corp. (NYSE, CY) and a vocal critic of the plaintiff bar. ''They just shifted where they sue you from federal court to state court.''
Rodgers has gone on the offensive. Cypress has filed suit against the lawyers who sued the San Jose chip maker, charging ''malicious civil prosecution.''
While it's helpful for investors to be aware of the new law, it applies most to corporate chief financial officers. Some of them are being a bit cavalier about the law, doing things like jokingly displaying on a screen at investor presentations a long message with tiny print about forward-looking statements. That's cute, but dangerous. Congress cautioned that ''boilerplate warnings'' won't suffice as cautionary language, reminds Stanford's Nelson.
Finance chiefs shouldn't let Nelson's upbeat findings lull them into forgetting the securities-law lessons they've learned. Otherwise investors -- and their lawyers -- will see to it they end up in more hot water than naughty frat boys.
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Silicon Street appears Monday, Wednesday and Friday. Contact Adam Lashinsky by snail mail: 750 Ridder Park Drive, San Jose, Calif. 95190; by e-mail: siliconstreet (408) 271-3782. |
