Kay Review: Information Overload Leads to Misguided Investments

Investors are being bombarded with information from listed companies, which is forcing them to make short-term, misguided decisions.

(March 1, 2012)  —  An information overload is overwhelming investors and forcing them into a short-term view, a report into equity markets and trading has shown.

Quarterly reporting by listed companies leads to excessive costs and bad decision-making by investors according to an interim review by leading economist John Kay.

The review said: “We gained a sense of overload in both the provision and receipt of information. The Asset Managers and Investors Council (AMIC) expressed the issue with a tone of resignation. ‘Publicly traded companies are subject to a constant flow of information. And although the AMIC feels they do pay too much attention to short term fluctuations in their share price, we believe that this is due to the nature of the environment they are in. They are forced to consider the press and investors’ concern on a permanent basis’.”

The review said having to create and disseminate the mountain of information had added to the overall cost of intermediation, but added that the underlying point was ‘more subtle’.

It said: “Information was often not wrong, not even necessarily misleading as a description of what it represented, but inappropriate for the purpose for which it was used: and that bad information, in this sense, led to bad decisions.”

The review said versions of the point were made by actors throughout the investment chain, from company directors to trustees.

Kay’s review cited asset management firm Standard Life Investors as saying ‘the noise – positive or negative – arising in response to quarterly interim management statements is an unwelcome distraction in the context of encouraging boards to focus on the long term development of the business’.

The review also suggested the adoption of mark-to-market accounting – and reporting – of corporate pension fund assets and liabilities had pushed them into closing the funds

It said that respondents had believed ‘the result of these provisions had been an acceleration of the closure of defined benefit pension schemes and a substantial reduction in the commitment of UK pension funds to both UK and overseas equities’.

“They suggested that this outcome had not been intended. Respondents also implied, and some explicitly stated, that the result benefitted no one: not pensioners, not the interests of companies which made pension provision, nor the UK economy.”

Kay received submissions from over 80 large investors and stakeholder groups. The final review will be submitted to the UK Treasury.

The Trade, aiCIO‘s sister publication, takes a look at the Kay Review’s thoughts on market infrastructure here.