Firm managers spend substantial time meeting privately with analysts and investors (eg, Thomson Reuters (2009); Soltes (2014); Brown, Call, Clement, and Sharp (2015); Bushee, Gerakos, and Lee (2018)). As evidenced by a wealth of anecdotes and surveys, such private communications are now found everywhere, becoming an important source of information to sell-side analysts (Brown et al. (2015)). Despite the importance of these off-line, non-public interactions, however, little is known about the timing, nature, and value of private communications, primarily due to the data limitations inherent in their private nature. Our recent article, ‘Private Communication between Managers and Financial Analysts: Evidence from Taxi Ride Patterns in New York City,’ seeks to fill this gap by constructing a unique proxy for unobservable, face-to-face private meetings between managers and sell-side analysts from New York City’s (NYC) daily taxi trip records.
The NYC Taxi and Limousine Commission (TLC) collects pick-up and drop-off dates and times of all daily taxi trips in NYC, along with their precise pick-up and drop-off locations. We identify the presence and timing of private meetings by mapping these detailed, large-volume taxi trip records to the GPS coordinates of companies in Compustat and brokerages in I/B/E/S. All identified taxi trips represent ex-ante unobservable private communications, as TLC uploads monthly taxi trip records with a six-month lag. Thus, analyzing taxi rides provides a unique setting to study private communications that have the potential to increase information gaps between participants and others who are left unaware of the occurrence of these private meetings.
We first validate our measure by showing that ride volumes increase significantly around earnings announcement dates (hereafter, EAD) and reach their peak on the day of the earnings announcement. The increase is economically meaningful; the weekly mean of ride volumes around EAD increases by 7.2 percent compared with four weeks before EAD. Moreover, consistent with taxi rides capturing sell-side analysts’ activities, we find that the magnitude of increases in ride volumes between a company and broker is significantly greater for brokers having analyst coverage of companies than for those without such coverage.
Using the validation analyses as a starting point, we examine the value of private communications. While managers have limited ability to convey material non-public information to analysts in private settings under Regulation Fair Disclosure (Reg FD), the unclear definition of materiality allows managers considerable leeway in helping analysts fill in their ‘mosaic view’ of the companies (SEC (2000)). Thus, private communications may improve the accuracy of analysts’ earnings forecasts and enhance the quality of their stock recommendations by providing analysts with likely non-material pieces of information that can become material, when taken together, within the context of other public and private information that they already have. For example, private communications around EAD could provide analysts with additional details and contexts into firm news and future developments, enabling them to better understand the implications of current earnings signals for future earnings (SEC (2002)). Consistent with our prediction, we find that private meetings around EAD are significantly negatively associated with analysts’ earnings forecast errors issued in the post-EAD period and positively associated with the profitability of recommendations issued after EAD (but these effects dissipate over longer horizons).
While our findings do not speak directly to whether managers violate Reg FD (and that is not the purpose of this study), it is certainly possible that analysts obtain material information during the in-person communications. To explore this possibility further, we exploit the fact that Reg FD mandates firms to make any non-public material information shared during private meetings public within 24 hours through filing Form 8-K. If non-public material information is shared and thus triggers 8-K filings, one should observe a positive association between taxi trips and Reg FD-specific 8-K filing dates. Consistent with this prediction, we find that taxi ride volumes significantly increase on the Reg FD-specific 8-K filing dates. Given that such private communications can still occur without triggering Reg FD-specific 8-K filings (Gleason, Ling, and Zhao (2020)), this evidence may provide a lower bound on the likelihood that analysts obtain material information during taxi trips.
Finally, we extend our analyses to exploring the determinants of taxi rides. We find that firms are more likely to communicate with analysts from large brokerages who have unfavorable views of the firm. Analysts are more likely to communicate with firms with which they have a shorter coverage history. Moreover, they interact more when the firm’s stock performs well in the market. Our results are consistent with analysts’ incentives to develop relationships with management and firms’ incentives to reach out to the broad pool of institutional investors and boost their valuations.
Overall, our findings that public disclosures trigger taxi trips highlight the complementary relations between public and private sources of information, suggesting that increases in public disclosures do not diminish the need for private communications in the post-Reg FD era. Further, the possibility that analysts might obtain access to material information through taxi trips suggests that excluded market participants may be informationally disadvantaged if they do not have opportunities to learn about the occurrence of taxi trips. Therefore, our results call into question the effectiveness of Reg FD in leveling the playing field for all investors.
Stacey Choy is PhD Candidate at the Rotman School of Management, University of Toronto.
Ole-Kristian Hope is the Deloitte Professor of Accounting at the Rotman School of Management, University of Toronto.
This post was first published at the CLS Blue Sky Blog here.