4.9 Size does matter
Businesses, big and small, are required to disclose material non-public information
promptly. The news disclosure process is regulated by the SEC. Therefore, it has been
assumed that if the process is followed all businesses receive the same treatment.
However, companies trading on smaller exchanges receive more scrutiny and
attention in the way the news is handled. As small businesses do not benefit from the
big public relation budgets that typify big businesses, stock moves may have an uneven
cycle. Businesses that benefit from big budgets are capable of maintaining a constant
stream of news—therefore, stock moves may have a more lasting trend than those of
small businesses. For instance, the well-known public relation practice of ‘‘crisis
management’’ is seen as normal business procedure for a big and established business.
On the other hand, the SEC often gives the interpretation of ‘‘stock price touting’’
when news is released and ‘‘managed’’ by smaller businesses while these types of
comments are very rare for larger businesses.
Big public relations and marketing budgets have a significant and sustainable
advantage in the stock market. There are many examples in the industry, but one of
the most recent and famous is the introduction of Apple’s iPhone. Apple hired top-notch
professional marketing and public relations firms and spent hundreds of millions of
dollars marketing the new product as far as six months ahead of its actual release date.
Naturally, Apple’s stock price appreciated considerably due to the awareness that was
created. The big marketing and public relations dollars helped to sell quite a few
products, even though the actual technology used to make phone calls that Apple
introduced at the time was behind that offered by other handset manufacturers. Addi-
tionally, Apple’s stock price appreciated significantly both during the iPhone pre-launch
and in after-launch periods. All of this helped to establish Apple as a new player in the
handset market and to set a nice platform for future iPhone technology releases that
allowed them to catch up and even surpass the market leader.
Very few small businesses could ever afford that type of campaign; if they could, it is
very likely that the SEC would classify the marketing of a non-existent product by a
small firm as touting the stock.
4.10 Corporate senior management under the gun
The SEC regulates the news that the senior management of publicly traded businesses in
the US releases to the public. The SEC does not regulate the news that the news media
publish about publicly traded businesses. This creates a difficult environment where
senior management can be constantly under the gun of the news media. If you were in a
war and your enemy had a constant supply of ammunition while you had only a limited
supply, it would be really difficult to survive, let alone win that war.
What is worse, some Wall Street investment banks can get into the news media
business really easily by creating research reports or simply by publishing earnings
estimates for corporations. When a company comes out and gives its earnings estimate
and an influential analyst raises that earnings estimate, the effect creates a very com-
petitive news environment under which senior management has very little or no way to
respond, due to various regulations that must be abided by.
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