Transnational equity analysis : evidence from UK investment analysts and institutional investors
This thesis responds to calls for research into transnational investment decisionmaking
by institutional investors and investment analysts. This issue has assumed a
growing significanceo ver recent decadesd ue to the internationalisationa nd
institutionalisationo f equity markets. Transnationald ecision-makingp rocessesa re
also of import to the debate on the harmonization of international accounting.
Using a questionnaires urvey and semi-structuredin terviews, the thesis investigates
three related issues. First, it examines and compares the analysis techniques used by
UK analystsa nd fund managersin analysingd omestica nd oversease quities. Second,
it investigatesth e sourcesu sedb y fund managersa nd investmenta nalystst o inform
domestic and transnational equity decisions, placing particular emphasis on
accounting information and direct company contact. Finally, the research examines
the attitude of the investment community to the international harmonization of
accounting. In particular, it assessews hether fund managers'a nd investment
analysts' decisions are affected by international accounting differences and gauges the
views of these important users of accounting information on the harmonization
The main findings are that fundamental analysis is the predominant appraisal
technique in domestic and transnational equity analysis, irrespective of the country of
domicile of the company being analysed. However, in order to facilitate international
accountingc omparisons,a nalystsa nd fund managersu se ratios and measuresw hich
are largely unaffected by international accounting differences when analysing
overseasc ompanies. In particular, earningsb efore interest,t ax, depreciationa nd
amortisation (EBITDA) is perceived as useful for cross-border comparisons.
In respect of the information sources used to analyse overseas companies, direct
company contact and the annual report remain the most influential overall. The
financial statementsa rc clearly the most heavily utilised componentso f the annual
report, yet there is some evidence that qualitative information in the annual report is
more useful in overseasc ompanya nalysis. UK fund managersa lso rely on locallybaseda
nalystsi n overseasc ompanya nalysisi n order to overcomep ossible
information asymmetriesa nd for assistancew ith internationala ccountingd ifferences.
However,f und managerse xpressedc oncerno ver analysts' independenced ue to
analysts'r eluctancet o j eopardiseth eir relationshipw ith companym anagement.
Although international accounting differences are not perceived to have a material
effect on transnational investment decisions, the findings demonstrate substantial
support from the financial community for harmonization. Indeed, analysts' and fund
managersd' ecisionsa re themselvesa market-basedfo rce for harmonization,a s
companiesu sing opaquea nd 'unfamiliar' accountings tandardsa re penalisedt hrough
higher capital costs imposed to allow for additional accounting risk.