CEO Presentations to Financial Analysts:Much Ado About Nothing?

Raymond M. Brooks, Marilyn F. Johnson, and Tie Su

We examine the impact of CEO presentations to security analyst societies on trading activity and tradingcosts for shares on secondary markets. One objective of CEO presentations is to increase the investor base.A second objective is to provide information about the firm, reducing the level of asymmetry. We examinedaily volume, number of trades, relative spreads, investor base, and spread components to determine ifthese meetings reduce information asymmetry. We find that the meetings do not produce any permanentchanges in trading activities or costs. In general, business continues as usual immediately following themeeting in terms of volume, spreads, and the level of information asymmetry.

• In publicly-traded corporations, the investor-relations function is a conduit of information betweenthe company and the investment community. Aneffective investor-relations program can benefit thecorporation. A survey of 150 chartered financialanalysts (CFAs) found that 70% believe that aneffective investor-relations program has a positiveeffect on stock prices (Kennedy and Wilson, 1980).Better-informed shareholders and analysts are alsomore likely to support "the long-term strategic plansand objectives of the company" (Pound, 1993). Merton(1987) derives a model in which increasing a compeiny'sinvestor base reduces its cost of capital and increasesits share price. Thus, investor relations activitieswhich attract new investors and retain currentinvestors may enhance the value of the firm.

The attention paid to investor relations is growingamong corporations. Recently the Journal of AppliedCorporate Finance devoted a large section of theSummer 1993' issue to this subject. Althoughinconclusive on the impact of investor-relationactivities, the general consensus is that the activities

Raymond M. Brooks is an Assistant Professor at Oregon StateUniversity, Corvallis, OR 97330. Marilyn F. Johnson is anAssistant Professor at University of Michigan, Ann Arbor,MI 48103-1234. Tie Su is an Assistant Professor at Universityof Miami, Coral Gables, FL 33124.

'See the Journal of Applied Corporate Finance 6 (No. 2,Summer 1993) for the roundtable discussion and four articleson relationship investing.

are important. An example is the importance Ceridian(formerly Control Data) placed on its investor-relations program to help turn the firm around.Ceridian officials met with institution andshareholder activist groups explaining the companystrategies and goals. These meetings were part ofits investor-relations program and specificallydesigned to attract investors and retain currentinvestors for a long-term capital commitment.

Investor-relations information disclosures rangefrom required reports such as 10-Ks, quarterly reports,and proxy statements, to a variety of voluntarydisclosures. In this study, we examine one of thevoluntary disclosure choices, CEO presentations tosecurity analyst societies.

CEO presentations are publicly announced events,and security analysts are invited to attend thepresentations. One objective of the meeting is toprovide analysts, not currently committed to the firm,information that convinces them to follow the firm andmore specifically convinces their clientele to acquirethe stock. A second objective is to provide analysts,^Sell-side analysts are not the only analysts that attend thesemeetings. Buy-side analysts, portfolio managers (representinginstitutional investors), investment advisors, and evenstockbrokers may be part of the audience. Each type of agentmay have different reasons to attend the meeting. However,it is unlawfui to distribute new information exclusively to asmall, select crowd such as the security analysts invited to thepresentation. New information can be simultaneously issuedto the public and by the CEO at the presentation.

19

20 FINANCIAL PRACTICE AND EDUCATION — FALL / WINTER 1997

currently committed to the firm, additional informationthat convinces them to recommend that their clientscontinue to hold or increase their holdings in the firm.If successful, this will increase buying pressure duringa period when information asymmetry is lowest.Classical microstructure models, such as Kyle (1985),Glosten and Milgrom (1985), and Admati and Pfleiderer(1988) predict that such a trading period should becharacterized by lower bid-ask spreads. The firsttestable hypothesis on the success of CEOpresentations is a reduction in trading costs throughlower bid-ask spreads.

Merton's (1987) incomplete information modelpredicts that an increase in a firm's investor followingwill result in a lower cost of capital and higher shareprice. Merton shows that firms with a limited investorfollowing benefit most from efforts to increase investorfollowing. This benefit is the so-called "neglected"firm effect. It is implied from this model that an increasedeffort in investor relations decreases informationasymmetry among investors, thereby lowering the costto trade. Merton explains why a firm would strive toincrease its investor base and thereby decrease tradingcosts. Analysts and investors are familiar with a subsetof available securities. Voluntary disclosure is one wayto attract new analysts and investors. CEOpresentations provide analysts with a low-cost meansof obtaining infonnation. After a meeting, analysts maybe more inclined to follow the firm (or start a long-termprocess to follow the firm) increasing the likelihoodthat clients will be advised to buy the stock. A secondtestable hypothesis on a successful meeting is anincrease in market-initiated buying without acorresponding increase in market-initiated selling.

Voluntary disclosure (cheap talk) faces the additionalburden of conveying credible information. Spence(1974) shows that if a choice does not cost, it can'tsignal. As a result the benefit of cheap talk is zero.Farrell (1995) clarifies the potential of cheap talk byshowing that if agents have different preferences overother's responses to the message, cheap talk can bebeneficial. The motivation for attending the CEOpresentation may not be to hear the message butrather to determine the response of others to themessage or to the way the CEO presents theinformation. Therefore, even though the informationmay be public knowledge, it may still solicit marketresponses as agents react to the actions of otheragents or the confidence of the CEO.

Some empirical studies have already providedevidence that these meetings fail to generatepermanent and significant changes in trading patterns.

'See Kennedy and Wilson (1980) for corporate responses towhy CEOs accept these invitations.

Byrd, Johnson, and Johnson (1995) examine analystfoUowings around CEO presentations and document atemporary increase in the number of analysts followingthe firm after the presentations. Sundaram, Ogden, andWalker (1992, 1993) find a significant positive stockprice effect over a two-day window for corporatepresentations to the New York Society of SecurityAnalysts and the AMEX Clubs. Lane and Orgeron(1992) find a temporary increase in trading volume (theday prior, day of, and day following a presentation)around corporate presentations to New York securityanalysts. Lane and Orgeron also find that pricereactions precede the meetings, and analysts do notchange their forecasts of future earnings following thepresentations. Regan (1980) claims that the real newsevent for returns is the announcement of the CEOpresentation. This price reaction is because CEOs willonly accept the invitation if they have good news.Regan shows that 63% of the firms have a stock pricerun-up prior to the meetings, while only 41% have astock price advance following the meetings. Thisevidence is consistent with Lane and Orgeron whofind positive abnormal returns for event days -5 to -1and not for days 0 to +4.

In a related voluntary disclosure, Frankel, Johnson,and Skinner (1997) find that the trading volumetemporarily changes around conference calls toanalysts and big investors. Volume increases duringand immediately following a conference call and thesize of the trade is greater than trading prior to the call,suggesting that some (larger) investors are trading onthis information.

We examine trading patterns following CEOpresentations and find no significant permanentchanges in volume, market-initiated buys, spreads, orcomponents of the spread. We conclude that, ingeneral, the meetings neither reduce trading costs norprompt an immediate increase in the investor basefollowing the CEO presentation. While the investorrelations function may be a very important aspect ofcorporate governance, in general, CEO presentationsdo not have an immediate impact on trading costs.The CEO presentations are more likely an integral partof a long-term investor-relations program that isdesigned to cultivate the relationship with currentinvestors and potential investors. This investmenttype of activity may be a particularly important firststep in trying to persuade analysts not currentlyfollowing the firm to follow the firm. These analystswill probably require a series of contacts with thefirm before adding the firm to their list of companiesand a positive first introduction may be a necessaryrequirement.

Our results indicate that CEO presentations, ingeneral, should not be expected to produce immediate

BROOKS, JOHNSON, & SU — CEO PRESENTATIONS TO FINANCIAL ANALYSTS: MUCH ADO ABOUT NOTHING? 21

and dramatic short run results. Rather, like aninvestment project, their contribution to the investorrelations program should be measured over the long run.

The remainder of the paper is organized asfollows. Section I presents the sample and data.The procedures are set forth in Section II; theresults are in Section III; and Section IV containsour summary and conclusions.

I. Sample and Data

The Association of Investment ManagementResearch (AIMR) publishes monthly calendarscontaining programs of all member societies. Fromthese calendars, a complete list of CEOs appearingbefore US security analysts societies during the periodJanuary 1, 1989 to December 31, 1990 was prepared.The sample was partitioned into presentations madeto societies in New York versus outside New York, andby the dates of the presentations. Despite the highconcentration of analysts in New York, a majority ofthe presentations are made to societies outside of NewYork. The presentations are more prominent duringthe middle of the week, with Mondays and Fridaysbeing the least favorable days for presentations. Thefrequency of presentations fall sharply in July andAugust to accommodate analysts' vacation schedules.

The meetings are normally scheduled two or threemonths in advance with an announcement in the AIMRevents calendar as well as an announcement on theFinancial News Network, Institutional ResearchNetwork, Business Wire, Reuters, Dow Jones Quotron,and Standard and Poor's Investor's Business Daily.The transcripts of the meetings at the NYSSA areavailable through Lexis/Nexis, and audio tapes areavailable ten minutes after the meetings.

Our list is screened for firms with intraday data onthe 1989 and 1990 New York Stock Exchange (NYSE)and AMEX Trades and Quotes Transaction Fileprepared by the Institute for the Study of SecurityMarkets (ISSM) tapes. Among other items, the datasource contains time-ordered daily transactions, quotes,trade prices, and trade volume." The screened sampleconsists of 350 ISSM firms with CEO presentations.

We use transactions prices, trade volume, and bid-and-ask quotes from two periods prior to the actualmeeting. The first period corresponds to the time beforethe announcements of the meeting, which is 100 to 70days prior to the meeting (t ^^ to i.^^. The secondperiod is after the announcement of the meeting butprior to the actual meeting, which is 40 to 10 days prior

*Based on the evidence in Lee and Ready (1991), a filter isused to reorder the posted quotes that precede a transaction byfive seconds or less. These quotes are placed after thetransaction in real time.

to the meeting (t ^ to t j^). These two periods are usedto establish typical trading patterns and costs oftrading for each firm. Recall that the meetings areusually announced two to three months prior to themeeting. This places the announcement during theperiod t ^ to t .'

Post-event daily averages are compared with bothpre-announcement and pre-meeting event averages.Post-event days are the day of the meeting, day t , dayfollowing the meeting, t^j, and days t o- t 4o' ^^ KivThe differences are the basis for measuring changesin volume, trading, spreads, and components of thespread following the CEO presentations.

II. Research Procedure

Changes in trading costs are measured by changesin the relative and dollar bid-ask spreads. The dollarbid-ask spread is simply the difference between thelowest ask and the highest bid at each quote revision.The daily average of the dollar spreads is the mean ofall dollar spreads following quote revisions. Whilesome quotes last longer in time and have deepersupport (buyers or sellers willing to trade for largervolumes), results presented are for the equally-weighted averages only.* Similar comparisons of pre-event and post-event averages are examined forrelative spreads. The relative spread is the dollar spreaddivided by the bid-ask spread midpoint.

A bid-ask spread decomposition model is used toexamine the level and changes in asymmetricinformation. The Masson (1995) estimator of therealized spread provides a procedure for decomposingthe bid-ask spread into two components, a transitorycomponent (labeled a transitory component becauseit has no impact on price movements) and an adverseselection component. Models such as Stoll (1989), andthe adapted version of Stoll by George, Kaul, andNimalendran (1991) suffer from a generated regressorproblem pointed out by Brooks and Masson (1995).This problem, coupled with the nonlinear estimationof components, causes the estimates using Stoll (1989)and George, Kaul, and Nimalendran (1991) to be highlyunreliable in small samples.' The estimates obtainedwith Masson's model are reasonable and consistent

'Days are trading days, that is, days that the NYSE is open fortrading. A typical month has 22 trading days and thus two tothree months prior to the meeting represents 66 to 44 tradingdays prior to the tneeting.'Time-weighted spreads also are calculated but produce almostidentical daily spread averages as the equally weighted spreadsfor each firm.'See Brooks and Masson (1995) for a full discussion of thesmall sample properties of Stoll's spread component estimatorand the unreliable estimates in small samples for both Stoll(1989) and George, Kaul, and Nimalendran (1991) componentestimators.

22 FINANCIAL PRACTICE AND EDUCATION — FALL/WINTER 1997

with both the benchmark provided by Stoll (1985) andthe recent estimates of the components by Petersonand Fialkowski (1994) using the TORQ (Trades, Orders,Reports, and Quotes) database.

The Masson estimator of the realized spread isbased on the original work of Glosten and Milgrom(1985) and uses the adjustment of quote midpointsfollowing trades to estimate the components of thespread. A complete presentation of the model isprovided in the Appendix A.

Once the mean transitory component estimate isobtained, the difference between the mean spread andthe transitory component estimate yields an estimateof the average adverse selection component in thespread. The relative adverse selection cost componentis defined as:

(1)

where

Sj = dollar bid-ask spread at time t, andCj = transitory component of the spread at time t.

These component estimates allow an examination ofthe levels and changes in levels of asymmetricinformation over time.

Finally, transaction volume is examined for the pre-event and post-event periods. Both total volume(number of shares traded) and number of dailytransactions are compared. In addition, volume ispartitioned by size and type (market-initiated buy orsell). The size partition is based on the number ofshares traded per transaction. The partition stratifiessub-samples into trades of one to five round lots(typically 100 to 500 shares), six to 10 round lots, 11 to25 round lots, 26 to 50 round lots, 51 to 99 round lots,and 100 or more round lots. In addition, trades areclassified as market-initiated buys or market-initiatedsales based upon the transaction price and thecontemporaneous highest bid and lowest askquotes. If the transaction price is above thecontemporaneous bid-ask spread midpoint, it isclassified as a market buy. If a transaction price isbelow the contemporaneous bid-ask spreadmidpoint, it is classified as a market sale. Tradeswith prices at the bid-ask spread midpoint are countedbut not classified as market-initiated buys or sales.

The purpose of classifying trades as buys or salesis to measure any shift in trading patterns followingCEO presentations. If the meetings are successful inbroadening investor holdings, then the number ofmarket buys should increase. In addition, if largeinstitutional investors are more sophisticated atprocessing new information than retail traders, large-volume trades should precede small-volume trades.

We also monitor the number of trades. If thepresentation decreases information asymmetry, thenthe number of trades should increase, reflectingincreased trading activity when informationasymmetry is low.

III. Results

The only significant changes we find are atemporary decrease in the relative spread, a temporarydecrease in dollar spreads following theannouncement of the forthcoming presentation, and atemporary increase in the adverse selectioncomponent of the bid-ask spread following the CEOpresentations. Trading volume and the number of dailytrades remained stable across this event. The dollarspread increased following the meeting, returning toits pre-announcement event period and, therefore, thereduction in the relative spread is a function of thestock price increase surrounding the CEOpresentation. Additionally, the adverse selectioncomponent increased rather than decreased followingthe presentation, inconsistent with a reduction in thelevel of asymmetric information. Exhibit 1 presents theaverage pre-event daily measures of dollar spread,relative spread, relative adverse selection component,total volume, number of trades, and changes in thesevariables around the CEO presentations.

Exhibit 1 presents the variables partitioned by thethree event periods: pre-announcement, pre-meeting,and post-meeting. The t-statistics for the full cross-sectional pooled sample are shown for comparisonsof the pre-announcement and pre-meeting periods,pre-meeting and post-meeting periods, and the pre-announcement and post-meeting periods. The dollarspread declined significantly, from 30 cents to 29 cents,after the announcement of a forthcoming CEOpresentation but returned to its pre-announcementlevel after the presentation. Following theannouncement of a forthcoming CEO presentation, therelative spread decreased from 1.13 % of the stock priceto 1.09% and is significant at the 0.01 level. Thisreduction continued through the post-meeting periodfalling to 1.08% of the stock price. However, coupledwith the increase in dollar spread following themeetings, the reduction in the relative spread is relatedto the increase in the price of the stock and is not areduction in trading costs. We found a significantchange in the adverse selection of the bid-ask spreadfollowing the meetings, unfortunately the componentincreased relative to both the pre-announcement andpre-meeting levels. Changes in other variables (volumeand number of trades) were not significantly differentacross the three event periods. In summary, anysignificant change in trading costs appear to be

BROOKS, JOHNSON, & SU — CEO PRESENTATIONS TO FINANCIAL ANALYSTS: MUCH ADO ABOUT NOTHING? 23

Exhibit 1. Changes in Spreads, Asymmetric information, and Voiume Around CEO PresentationsThis exhibit presents statistics of changes in five variables around announcements and presentations of CEO meetings.The five variables are the dollar bid-ask spread (DSP) measured in dollars, the relative bid-ask spread (RSP) in percentages,the adverse selection component (ADV) of the bid-ask spread, daily volume (VOL) in round lot of shares, and dailynumber of trades (NTRADE) in round lot of shares. Pre-announcement period is defined as -100 to -70 days before theCEO meetings. Post-announcement period is defined as -40 to -10 days before the meetings. Post-meeting period is theday of CEO presentations. All numbers above are the average measures across all firms in the sample during the correspondingtime period. The t-statistics are reported in brackets under each measure. Pre-announcement t-statistics measure thedifference between pre-announcement and post-announcement means. Post-announcement t-statistics measure thedifferences between post-announcement and event-day means. Post-meeting t-statistics measure the difference betweenevent-day and pre-announcement-day means.

Pre-Annoueement Post-Annou ncement Post-Meetlhg

DSP

RSP

ADV

VOL

NTRADE

0.30***(-3.75)

1.13(-1.25)

0.46(0.05)

1927(0.10)

123(0.78)

0.29(0.44)

1.09**(-2.39)

0.46(1.05)

2049(-0.19)

126(-0.91)

0.30(-0.93)

1.08*

(-1.71)

0.47(1.21)

2001(0.45)

122(-0.50)

***Significant at the 0.01 level, one-tailed t-test.••Significant at the 0.05 level, one-tailed t-test.

•Significant at the 0.10 level, one-tailed t-test.

temporary after a CEO presentation.The second hypothesis is that CEO presentations

should increase investor following. To examine thishypothesis, we partitioned the sample into buy ordersand sell orders. We then partitioned the sample by thesize of the trade. If large, institutional traders are usingthis information as is the case with conference calls,we would expect to see increased volume in the largestsize trade categories. Exhibit 2 presents the size andtype partitioned results.

Across all sizes and both types of trades we foundno significant changes from their pre-announcementaverages. We stated an increase in market buyingactivity would be an indication of an increasing investorbase. The only indication of increased trading comesfrom increased selling of large block trades (trades of10,000 shares or more) following the announcement ofthe presentation. However, this increased selling isnot significantly different from the pre-announcementperiod. If anything, the trading activity in terms of thenumber of trades remained relatively constant acrossthe period leading up to the announcement and throughthe presentation.

While the full cross-sectional results show nopermanent impact from the presentations, CEOpresentations could be advantageous for a subset of

firms. Smaller firms may find CEO presentations anintegral part of their investor-relations programs. Toexamine this notion, we partitioned our sample intothree portfolios. One partition was based on the valueof total assets of each firm. A second partition wasbased on the annual trading activity in terms of thenumber of trades executed for each firm. Results of thesmallest-size (least traded) portfolio, the median-sizeportfolio, and largest-size (most traded) portfolio arereported in Exhibit 3.

The results were the same as the cross-sectionalresults in that the changes are mostly statisticallyinsignificant or temporary for each portfolio. We alsoextended the post-meeting window to the day afterthe meeting to aid in the interpretation of changesfollowing the meeting. For example, the smallest-sizeand median-size portfolio based on number of tradeshas a significant reduction in the relative spreadfollowing the meeting. But this reduction is short-lived,as it returns to the pre-meeting level on day t ,. Thefindings are robust across sizes and trading activities.

The lack of an immediate response is not necessarilyan indication that the meetings have no value.Merton's (1987) model of investor base cultivation doesnot suggest that there must be an immediate responseto marketing activities. Therefore, we expand the post-

24 FINANCIAL PRACTICE AND EDUCATION — FALL/WINTER 1997

Exhibit 2. Changes in Buying and Selling Activity Around CEO PresentationsThis exhibit presents statistics of changes in buying and selling activities around announcements and presentations ofCEO meetings. Trading activities are partitioned by the number of shares traded in each transaction during a trading day.There are six categories of trading sizes, measured in round lots of shares: 1-5, 6-tO, 11-25,26-50, 51-99, and 100 or more,Pre-announcement period is defined as -tOO to -70 days before the CEO meetings. Post-announcement period is definedas -40 to -10 days before the meetings. Post-meeting period is the day of CEO presentations. All numbers above are theaverage measures across all firms in the sample during the corresponding time period. The t-statistics are reported inparenthesis under each measure, Pre-announcement t-statistics measure the difference between pre-announcement andpost-announcement means. Post-announcement t-statistics measure the differences between post-announcement andevent-day means. Post-meeting t-statistics measure the difference between event-day and pre-announcement-day means.

Size of Trade Pra-Announcement Post-A nim tmeement P<Mtt-M«etlng

I - 5

6 - 10

II -25

26-50

51 -99

100+

Buy Orders

74(0,79)

61(0.52)

85(1,14)

113(0.32)

111(0,61)

305(-0,90)

76(1,31)

64(1,28)

90(1,42)

122(0,50)

120(0,12)

296(0,49)

78(0.90)

65(0,88)

93(1.04)

122(0,28)

123(0,57)

297(-0,14)

Sell Orders

1 - 5

6 - 10

11-25

26-50

51 -99

100+

70(-1,00)

56(0,21)

75(0.34)

90(0,86)

89(1.01)

243(1.47)

69(1.02)

60(0.24)

83

(0,08)

103*(1,79)

102

(-0,55)

ni(-0,45)

70(-1.13)

61(0,53)

85(1.21)

106*(1.77)

97(1.15)

251(0.02)

•Significant at the O.tO level, one-tailed t-test.

event periods to 20 days, 40 days, and 60 trading daysafter the meetings. Exhibit 4 presents the changes inthe trading variables following the CEO presentationspartitioned into three portfolios by firm asset size,

A priori, we would expect a gradual increase involume and a reduction in the relative spread andrelative adverse selection components. Few of themeasured changes are significant and trading activitiesremain fairly constant for three months following theCEO presentations. The smallest firms actually

experience an increase in trading costs as both dollarand relative spreads significantly increase 60 days afterthe presentation. However, this period may becontaminated with additional information about a firmas the window probably includes quarterly reports andreleases such as earnings announcements.

We also examined individual firm changes duringthis extended post-event period. During this extendedperiod, all changes appear to be temporary. Again, weuse an extended window for the post-event period.

BROOKS, JOHNSON, & SU — CEO PRESENTATIONS TO FINANCIAL ANALYSTS: MUCH ADO ABOUT NOTHING? 25

Exhibit 3. Changes in Spreads, Asymmetric information, and Volume Around CEOPresentations: Partitioned SampieThis exhibit presents statistics of changes in five variables around CEO presentations. The five variables are the dollar bid-ask spread (DSP) measured in dollars, the relative bid-ask spread (RSP) in percentages, the adverse selection component(ADV) of the bid-ask spread, daily volume (VOL) in round lot of shares, and daily number of trades (NTRADE) in roundlot of shares. PMM stands for pre-meeting mean, which is the average during -40 to -10 days before the CEO meetings.Day 0 measures changes in a variable in day 0 (meeting day) from PMM. Day 1 measures changes in a variable in day 1(one day after the meetings) from PMM. The results are further partitioned into three categories by daily number of tradesand by firm's asset size. Results are reported for each partitioned subsample.

DSP

RSP

ADV

VOL

NTRADE

DSP

RSP

ADV

VOL

NTRADE

••Significant

PMM

0.288

1.591

0.452

686

50

0.296

1.597

0.455

339

21

Small FIrmi

Day 0

0.001

-0.067

0.033

149

8

-0.003

-0.092**

0.027

23

1

1

Day1

0.003

-0.030

0.001

15

6

PMM

Panel A.

0.305

0.980

0.465

1467

90

Median Firms

Day 0

.By Asset Size

-0.002

-0.038

0.017

-239

-12

Panel B. By Number of Trades

-0.002

-0.013

-0.006

-21

2

at the 0.05 level, one-tailed t-test.

0.304

1.003

0.472

1122

66

-0.004

-0.031**

0.018

-15

0

Dayi

-0.003

-0.004

-0.011

-161

-5

-0.007

-0.026

-0.016

-189

1

PMM

0.289

0.731

0.459

3858

231

0.282

0.752

0.450

4349

271

Large Firms

Day 0

-0.002

-0.016

-0.005

140

-8

0.002

-0.004

0.002

50

-13

Day1

-0.005

-0.019

-0.005

-221

-16

0.003

-0.007

0.005

-153

-17

day t 2 , day t ^ , and finally day t ^ . Consistent withthe previous finding, relative spreads are lower acrossa significant number of firms for an extended period,up to 40 trading days past the CEO presentation. Bythe third period, day t ^ , nearly half the firms haveincreases in dollar spreads, the adverse selectioncomponent of the spread, and decreases in volume,just opposite of what we expected for a successfulCEO presentation. Only 10% of the firms havesignificant reductions in their spreads and increasedvolume. Therefore, in general, any change in tradingactivity is temporary, and only a very small percentageof the CEO presentations have a permanent positiveimpact on trading activity.

IV. Summary and Conclusions

CEO presentations to security analyst societies arepopular components of investor-relations programs.One stated objective of the CEO presentations is to

increase the investor base. A second stated objectiveis to provide information about the firm, reducing thelevel of information asymmetry. In order to determinewhether or not these meetings reduce the level ofinformation asymmetry, we examined some of themarket trading patterns: volume, number of trades,relative spreads, and spread components. In addition,we examined changes in the investor base byexamining changes in market-initiated buying andselling activity of small and large investors. We findthat the meetings, in general, do not produce anysustained changes in trading activities. In fact,business continues as usual in terms of buying andselling activities, volume, and spreads for a periodup to 60 days following the CEO presentations. Weconclude that these presentations do not providean immediate increase of the investor base of thefirm and are more likely a long-run program forcultivating investor relations. Our results are alsoconsistent with the literature on cheap talk, in thatthese messages, in general, do not signal any new

26 FINANCIAL PRACTICE AND EDUCATION — FALL/WINTER 1997

Exhibit 4. Long-Run Changes in Spreads, Asymmetric information, and Voiume Foilowing CEOPresentationsThis exhibit presetits statistics of chatiges in five variables following CEO presetitations. The five variables are the dollarbid-ask spread (DSP) tneasured iti dollars, the relative bid-ask spread (RSP) iti percentages, the adverse selection component(ADV) of the bid-ask spread, daily volume (VOL) in round lot of shares, and daily number of trades (NTRADE) inround lot of shares. PMM stands for pre-meeting mean, which is the average during -40 to -10 days before the CEOmeetings. Day 20, 40, and 60 means are the averages in each variable at 20, 40, and 60 days after CEO presentations,respectively. The results are further partitioned into three categories by firm's asset size. Results are reported foreach partitioned subsample.

DSP

RSP

ADV

VOL

NIRADE

DSP

RSP

ADV

VOL

NTRADE

DSP

RSP

ADV

VOL

NTRADE

PMM

0.288

1.591

0.452

686

50

0.305

0.980

0.465

1467

90

0.289

0.731

0.459

3858

231

Day + 20 IMimB

Panel A. Small Firms

-0.001

0.024

0.019

-79

2

Panel B. MaOtm Firms

-0.005

-0.008

0.002

-109

-1

Panel C. Large Firms

-0.005

-0.003

-0.003

-473

-8

Day + 40 MfMBS

-0.002

-0.013

-0.021

-56

3

-0.003

0.033

-0.004

-81

-2

-0.005

0.019

-0.014

118

6

Dtty + 60 MMns

0.020

0.129

0.003

59

6

0.010

0.023

-0.019

-83

1

0.004

0.044

-0.003

429

32

information. However, again, these results do not implythat these meetings are unimportant.

CEO presentations may be much like amaintenance program that absent the presentationwould lower the investor base. The true value ofCEO presentations therefore may lie in the long-run impact that comes from analysts seeingmanagement face to face and hearing top managementtalk about the firm and its prospects. This provides ananalyst with an opportunity to assess managementand get a qualitative assessment of their strengthsand weaknesses. In addition, analysts have anopportunity to ask questions and confirm the generalmarket's interpretation of the company. We cannot test

this long-run benefit hypothesis with short-termtrading data but would be remiss if we did notacknowledge that there may be, and probably are,positive benefits from these meetings outside thescope of our examination. Additionally, the previousempirical results that have demonstrated onlytemporary changes following these meetings may alsofall prey to the short-term investigation procedure ofevent studies. Thus, these examinations may not beable to reveal the long-run benefits of this portion ofthe investor-relations program. Finally, from the firm'sperspective these meetings may not so much be"Much Ado About Nothing," but rather "All's WellThat Ends Well." •

BROOKS, JOHNSON, & SU — CEO PRESENTATIONS TO FINANCIAL ANALYSTS: MUCH ADO ABOUT NOTHING?

References

27

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Appendix A

The Masson (1995) decomposition model is based on the original work of Glosten and Milgrom (1985)and uses a series of quote midpoint adjustments following trades to estimate the adverse selectioncomponent of the spread.

Tbe systematic adjustment of the quote midpoint ([ask + bid]/2) induced by the last trade is 1/2 Q,Aj, whereQj is an indicator variable that takes on a value of -1 if the last trade was at the bid or +1 if the last trade was atthe ask, and A is the adverse selection component of the spread. Absent an adverse selection component (A ),transaction prices bounce between the bid and the ask quotes, but the quote midpoint remains constant. Withan adverse selection component, the adjustment of the quote midpoint following a trade refiects the level ofinformation asymmetry. For example, if the last transaction conveys negative information, the specialist lowersthe bid and ask quotes such that the new lower quote midpoint reflects the new information. The systematicadjustment of quotes over a series of transactions allows for an estimation of the average adverse selectioncomponent of the spread. This component, in concert with the size of the spread, is a measure of the level ofasymmetric information associated with the underlying stock.

28 FINANCIAL PRACTICE AND EDUCATION — FALL / WINTER 1997

Three observable prices for a stock exist: a transaction price (P'), a bid price (P*"), and an ask priceTransaction prices are related to the quotes as follows:

where,

Q = - 1 if transaction at the ask or -1 if transaction at the bid;Sj = spread (lowest current ask quote minus highest current bid quote);P = transaction price; andP" = standing quote midpoint.The spread at time t, S , is assumed to be i.i.d. Poisson with parameter X. This captures the discrete nature of

the data. S^can be divided into atransitory component, C|(Cjhas also been called the order handling component,the execution cost component, or the realized spread) and an adverse selection component, A . If the twocomponents of the spread, C and A, are assumed to be distributed independently Poisson with parameters X^and X^, respectively, then the total spread also has a Poisson distribution with parameter X such that X is equalto X,j,plus X^.^

The systematic adjustment of the quote midpoint (P^) induced by the last trade is:

e, (2)

where e is the public information innovation. The public information innovation (e,) following a trade, andbefore the next quote revision, is assumed to be zero. The public innovation term is dropped because quoterevisions come very quickly after a trade, leaving very little time for the arrival of public information betweenthe trade and the new quote.

The revised quote midpoint can be related to the last trade as follows:

P^ = P ' - 1/2C + e, (3)t-i

The absolute value of the difference between the revised quote midpoint and the transaction price is equal toone half the transitory component of the spread:

IPI -P | J = l/2Cj + e| (4)

A method of moments estimator of the mean transitory component is obtained by substituting the sampleaverage for the population mean:

T

Once the mean transitory component estimate is obtained, the difference between the mean spread and thetransitory component estimate yields an estimate of the average adverse selection component in the spread.The relative adverse selection cost component is defined as follows:

. = (S,-C,)/S, (6)

'The issue of independence between the transitory component and the adverse selection component is addressed in Masson (1995).