Transparency is the cornerstone of financial markets. Without it, markets cannot function, as there will be imperfect information, inefficient markets and a lack of trust from market participants, leading to lower participation.
Put simply, the cost of opaque markets is added risk for market participants. This added risk filters through to the underlying value of the securities issued by a company; particularly those held by minority shareholders or bondholders who tend to have less access to information than senior shareholders do, as these typically have direct access to management. The result is lower valuations than those under perfect information.
It is disappointing that in today’s day and age, the attitude towards disclosure remains one of apprehension in many cases. A better-informed investing public is a more willing investing public.
The trend from an accounting requirements perspective, particularly those imposed by the IFRSs is one of deeper disclosure requirements and accounting methods that are more objective. A matter that in my opinion remains unaddressed is the forward guidance given by companies that remains inconsistent from company to company.
An analogy I like to use is one of a young child entering a room. If the lights are switched off (analogous to poor disclosure), the child is likely to be scared and apprehensive prior to entering. On the other hand, if the room is well lit, the child is able to discern his/her surroundings and enter more confidently.
Drawing on examples from local companies, Malta International Airport plc is a standout example of excellent disclosure and communication with their shareholders and investing public. Apart from the regulatory imposed interim and annual financial statements, the company goes an extra mile to include monthly performance statistics and industry KPIs together with forecasts for the current year in the literature distributed to stockbrokers and the public. As a result, stakeholders feel confident in the investment decisions they are taking as they develop a deeper understanding of the risks to which they are exposed. This in my opinion has been an added tail wind to the share price performance, apart from the company’s fundamental strengths.
On the opposite end, recently I attended a brokers meeting whereby the company’s representative involved was explaining a transformation programme that is expected to have a considerable impact on the financial performance of the company in the coming years. When egged on by the attendees to disclose the scale of the program, the reply was simply “several millions” and nothing further. As you can imagine, the lack of disclosure creates an unnecessary level of ambiguity when trying to evaluate the fundamental positon of the company. The result is uncertainty and a lack of confidence in the prospects of the company, potentially penalising the company excessively due to the uncertainty involved.
I appreciate that in certain instances, the management of a company might be hesitant in disclosing certain information to the public due to the fear that competitors might benefit from such information to the detriment of the company. This however does not apply in most cases, and far from expecting management to disclose their secret recipes, I sincerely hope that locally listed companies take a leaf out of overseas practices as benchmarks, and adapt a stronger culture of communication as our financial industry develops.
This article was issued by Simon Psaila, Capital Markets and Research Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.