Showing posts with label News. Show all posts
Showing posts with label News. Show all posts

Research shows how Chinese Companies use Embedded Analysts

So I came across this media release of a research done that shows how Chinese companies use what is called "embedded analysts" to reveal sensitive information. This piqued my interest as I was wondering what is this concept of an embedded analyst. Was it an analyst who works in the firm on secondment?

Anyway, the article is extracted below:

SOURCE: The Chinese University of Hong Kong (CUHK) Business School

Research by CUHK Business School Reveals How Chinese Companies Use ‘Embedded Analysts’ to Reveal Sensitive Information

HONG KONG, CHINA - Media OutReach - June 7, 2016 - Chinese companies face a dilemma. They need to straddle two worlds -- there's the old China where business is still conducted on a "who you know" basis, and the emerging world of financial markets, regulations and transparency, says T.J. Wong, Choh-Ming Li Professor of Accountancy and Director of Centre for Institutions and Governance at the Chinese University of Hong Kong (CUHK) Business School.

"As Chinese financial markets develop, companies want to reduce the cost of borrowing. In order to build trust and inspire investors, they know they need to improve transparency," says Prof. Wong who has researched the issue in the latest study entitled "The dyadic ties of managers and financial analysts and their externality on a firm's information environment" with Prof. Gwen Yu at Harvard Business School and Prof. Zengquan Li at Shanghai University of Finance and Economics.

"But companies know that revealing sensitive information such as their political or strategic ties might also be damaging. So what do they do if they want to borrow cheaply beyond friends and family? The two systems are colliding and companies need a solution," he says.

In the West, as Prof. Wong explains, regulations and economic infrastructure to protect investors are well established. But in emerging economies such as China, legal safeguards are not yet robust enough to reassure lenders that it is safe to invest in unfamiliar companies through stock markets. So if a company wants to borrow, how can it build trust among external investors?

Prof. Wong and his collaborators have been investigating how Chinese companies operate as the nation ploughs on with the economic reform.

"We have investigated what we call 'the embedded analyst'," says Prof. Wong. "This is a financial analyst with personal connections to a company, but with enough professional credibility to be able to inform wider markets about that company. At the same time, companies use these analysts to communicate and to protect sensitive information about strategic ties. We look at how firms exploit this channel of communication to cut their costs of borrowing."

He is keen to point out that it is not a concept dreamed up in the "ivory towers" of academia. He and his collaborators have had lengthy conversations with analysts in China before embarking up on the research examining a comprehensive cross section of listed companies in China and associated analysts for a ten-year period from 2005 to 2014.

The study shows a "spillover" effect that analysts who are well connected with a company can help spread accurate information and forecasts about the firm, and this effect of information beyond the company's and analyst's network is stronger when companies are keen to raise finance.

While the research finding won't surprise anyone working within China's markets, it does help explain to the rest of the world how things work in Chinese companies, says Prof. Wong.

But the research also throws up more questions in the West than it answers, such as: Why is it so important to know about a company's links to politicians or other strategic partnerships?

Previous research has already shown that relationships play a strong role in business in China; historically Chinese firms relied solely on their networks to win contracts. And each business relationship may differ slightly -- making it impossible to compare like for like when evaluating one company against another.

"For example, a chief executive knows someone from schooldays and does a deal. He then does a deal with his brother-in-law, and then another transaction with someone he knows socially. Every deal is different and nothing may be written down formally. You couldn't compare these deals with -- say -- IBM signing a deal with three different companies, where terms of each deal will be spelled out and in the open," he explains.

So why don't Chinese companies move towards greater transparency? Why aren't they more open about their beneficial political or strategic connections?

"There's a high cost -- a domino effect of openly revealing a political relationship -- it may damage other future relationships," says Prof. Wong. "The information doesn't affect just one deal; it affects all future deals," he says.

However, if companies opt not to disclose links which would help them raise more funds on capital markets, then they remain limited to borrowing only from friends and family.

When Prof. Wong presents this research in the West, business students often ask these questions: "Why should we rely on analysts to reveal sensitive information? Why doesn't the chief executive let investors know?"

Prof. Wong explains that unlike managers, who may have a shorter tenure and may be tempted to "big up" company health for personal gain, analysts tend to hold their positions for longer, and so potentially have more professional credibility.

That's not to say that the researchers can rule out any hints of insider trading. The firms' incentives to raise external capital and the intermediaries' market reputation and discipline can to a large extent mitigate such possibility of collusion between the firms and the embedded analysts.

But the academics did allow in their research for some level of commitment from analysts. Respected analysts are playing a bigger role in Chinese domestic markets, which see much activity from individual retail investors. As a nation, the Chinese have the highest savings rate in the world, and are keen to invest, and so are heavily dependent on analysts' forecasts.

By looking publicly available information to determine how analysts might be connected to a company -- either through a shared university, or time spent working together, or geographic proximities, the researchers reveal that this "social capital" allows companies to communicate private information to analysts, who in turn spread the word about a company's health and financial forecasts to their own networks. As a result, the more connected the analysts, the more accurate the earnings forecasts they make.

"It's a tacit agreement between analysts and the company -- they use 'secret' knowledge to make a hard earnings forecast, but because they have a strong reputation in the market, the signal crosses to wider analysts and investors who know they can trust the information," says Prof. Wong.

The researchers also found that more accurate information about a firm emerges when it plans to raise funds through new share issues. Also, companies which are particularly reliant on their political connections, or which have a concentrated number of customers and suppliers, tend to rely more on embedded analysts to release information.

All of which go to make well-connected analysts important players in Chinese markets.

"These embedded intermediaries can build a bridge between emerging economies and the west. They need to have grown up or at least spent a long time working in China and speak the language -- if they have a good reputation in the market, they can be very powerful."

And this role may not be restricted solely to financial analysts, says Prof. Wong, suggesting that future research might also look at other figures with a close connection to Chinese companies -- such as auditors or fund managers.

Back at CUHK Business School, when Prof. Wong introduces his students to these concepts, they are enthusiastic.

"They find it very new," he says. "In textbooks, students only read the Western perspective when it comes to how companies are organised and how they trade. But these cultural and political perspectives are important."

But is this system of informal communication sustainable?

"Until Chinese law, accountancy and market regulations protect investors, companies will need this kind of embedded intermediaries," says Prof. Wong.

"There's no quick fix. It takes a long time, maybe decades, to establish the kind of economic and legal frameworks to build trust in the markets. But we want to show that this level of closeness and ties with analysts isn't necessarily bad as it fulfils an important role in China," he says.


Reference

Zengquan Li, T.J Wong and Gwen Yu, "The dyadic ties of managers and financial analysts and their externality on a firm's information environment", 2016. Working paper.



Burger Taste Test : Beef or Horse

So the latest news on the horse meat scandal is that IKEA's meatballs have been implicated too.  Well, there is no idea yet whether Singapore has been affected.  Anyway, here is a burger taste test video.


Pope Benedict XVI To Resign on 28 Feb, Cites Health

Pope Benedict XVI (age 85) has announced that he will be resigning on 28 Feb as leader of the world's Catholics.  He will be the first pontiff to resign in nearly 600 years.  Making his announcement in Latin during a meeting of Vatican cardinals, he cited ill health stating that carrying out the duties of the pope required "both strength of mind and body".

The pope was number #5 in Forbes most powerful people list for 2012.  His sudden announcement is almost certain to plunge the entire Catholic world into a crazed speculation on who will most likely be the next pope to succeed him.

Heavy Rain and Flash Floods in Singapore

The sky gave way early this morning and it started to pour like crazy over at my place. Good thing we sort of predicted that there would be heavy rain and decided to bring along an umbrella while we were eating at the nearby market.

While driving, I could hardly see the road ahead of me even with my wiper turned to full speed. And I was almost pretty certain that there would be flash floods around Singapore after it was still raining like closet to 2 hours later. Sure enough, on my way back, parts of the expressway was flooded. Just read the news too that Tanglin Mall's basement also got flooded.

Perhaps the weather is really getting more freaky in recent years. But surely there has been a case of one too many flash floods in the past few years. It wasn't too long ago that I wrote about flooding in Singapore. While we definitely cannot become flood free throughout the whole of Singapore, I think it is important that certain parts of Singapore should be flood free. And Orchard Road definitely deserves to be flood free.

I am a noob/amateur regarding real estate but I would like to think that if flooding becomes common occurrence in Orchard Road, the developers would have to charge a lower rent. Insurers will also probably charge a higher premium to insure the shops located at the lower levels in case of these freak floods that occur. All these translates to "losses" to Singapore in one way or another.

For the rest of Singapore, I am sure we can accept flash floods now and then. But still, this should not be occurring near residential areas and stuff.

Elections, Royal Wedding and Osama is Dead

So many historical events seem to be taking place over the past few days.

Singapore General Elections 2011.

Yes. By now, most people are probably suffering from an overdose of election news and trivia ranging from Kate Spade to Nicole Seah. In fact, facebook seems to be flooded with so much election news that I am suddenly surprised at how politically charged so many of my friends are. Well, this is a once in five years event and I am keenly keeping watch on the elections since 82 out of 87 seats are being contested. My predictions? I think the opposition party will only keep one seat - Hougang.

Royal Wedding

So while we were suffering from an overdose of election news, the royal wedding was really a good break. Spent quite some time in front of the TV watching the live footages of the royal wedding even as I remarked to myself the fact that I have visited those places in London a very long time ago. I think the royal couple look really sweet.

The Royal Wedding Order of Events

Osama is Dead (Latest News)

With a wedding, there needs to be a funeral. Well, the news is out that Osama bin Laden is dead. Shot in the head. After 2 wars, and an entire US army hunting him down, it took almost a decade just to kill this man. And he was in Pakistan. Not Iraq or Afghanistan where the wars took place. Scroll below for a gruesome picture of Osama.

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Flooding in Singapore...Again..

I just read the news and it confirmed my fears. Singapore was flooded again today. Apparently, flash floods hit certain areas and trees also fell at certain places.

I am not surprised. Afterall, when I went to buy my breakfast, I saw a blowhole!

Water was gushing out from a drain cover along the walking pavement and because of the pressure or something, water spurted out like a mini blowhole every few seconds.

What an interesting sight!

Hopefully none of my readers here got caught in the flood while going to work.

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