Corporate visits are one of the key methods investors use to understand a company’s actual condition. However, these visits don’t always provide reliable information. In this article, we explore the limitations of corporate visits and discuss what investors need to be mindful of.
Institutional Investors vs. Individual Investors
The attitude companies show toward institutional investors is markedly different from that shown to individual investors. Institutional investors are trusted not to sell off shares immediately upon learning negative information and not to indiscriminately spread confidential information. In contrast, individual investors, who typically invest smaller amounts, are likely to sell their shares and spread the news if they learn about internal issues. Hence, companies often only show the surface to individual investors.
Without being an auditor, wandering freely inside a company is not possible. Individual investors visiting a company can only see the few places the company is willing to show and must leave nodding their heads in agreement.
The Reliability of Responses
There are investors who prepare financial statements and questions in advance to receive sincere answers. However, even if the company responds diligently, expecting honesty might be too much. Even when analysts visit, companies are eager to present favorable data but try to hide unfavorable data as much as possible. Even if some premium information is revealed, company officials may urgently request analysts to prevent its external dissemination, making it difficult to include such information in reports for individual investors.
Media and Corporate Visits
Journalists, although in a slightly better position for corporate visits, must be cautious due to the risk of lawsuits. Interpreting press releases differently and reporting them can lead to consequences. Hence, they tend to publish the company’s claims as they are. Each journalist covers specific industries and companies, and negative articles can strain future relations.
The Enron Case
When Enron’s stock price became unstable in the United States, many investors visited Enron. They decided to invest because there seemed to be no flaws in the company or its financial statements. Even when negative rumors about Enron spread and issues with its financial statements were raised, some value investors bought more of Enron’s stock, believing in “buying when others are fearful.” However, if a company intends to commit fraud, it is hard to uncover problems no matter how meticulously analysts investigate.
Conclusion
Corporate visits are a valuable tool for understanding a company’s situation, but their limitations must be recognized. Differing attitudes towards institutional and individual investors, the difficulty in obtaining honest answers, and the constraints faced by the media are critical considerations. The Enron case serves as a reminder that it is challenging to detect all problems through corporate visits alone. Investors should analyze various information comprehensively and make cautious investment decisions, keeping the limitations of corporate visits in mind.