ASX Listing Rules, Stock Prices and Telstra
Introduction
In the business industry, information that could affect the market system in general should be properly disclosed. In the case of Australia, the Australian Stock Exchange (ASX) has developed certain regulations that govern the disclosures of price sensitive information by listed entities. Complying with these regulations is then essential so as not to cause disruption in the business economic operations. Telstra Corporation Limited (TLS), an Australian telecommunications and information company is among the enlisted companies covered by the ASX Listing Rules.
The main operation of the company include the provision of telephone lines, which allow local, long distance and international calls, online services, mobile communications, directory provision and pay TV. The Australian Government serves as the company’s major shareholder. In 2005, the company had announced a profit downgrade caused by the fall of its shares. In this paper, the case of this company, particularly on its disclosure, will be analyzed using the provisions cited in the ASX Listing Rules. Furthermore, the relation of stock price movements with accounting income numbers will be established using academic researches.
ASX Listing Rules
Disclosure is a significant aspect of investor protection and market integrity. Within this framework, continuous disclosure is considered an essential component. Specifically, this enables investors to develop accurate judgments of the price of certain securities. Moreover, this ensures that security prices represent their corresponding economic value. Legal obligation is bestowed on listed entities for the disclosure of price sensitive information once it reached their awareness. The failure of the entities to comply with this legal obligation can increase the possibility of insider trading and can result to a partly informed market. This then should be avoided as it does not support the interest of the investors as well as the economy as a whole. For this reason, it is then essential that rules and regulations controlling the disclosures of price sensitive information are enforced. Certain condition in relation to this topic had been developed by the Australian Stock Exchange (ASX) and found on the ASX Listing Rules. Part of these regulations is the companies’ commitment to full disclosure of this information.
With regards to continuous disclosure, the ASX Listing Rules obligate listed entities to provide immediate disclosure of price sensitive information to the ASX, particularly on data that would cause a material effect on the value or price of the securities or influence the investors’ decisions to hold or trade their securities. In this ruling, the ASX do not require the entities to disclose information that a reasonable person would not expect disclosing, are considered confidential or are exempted from the Listing Rule. Examples of this information could be those that are relevant to incomplete negotiations or proposal, insufficiently explicit or those generated for the purpose of internal management.
Once the entities have become aware of any price sensitive information, the Company Secretary must be informed immediately. The Company Secretary, along with the General Counsel, Chief Financial Officer and Managing Director will discuss whether the information must be disclosed to the ASX. The release of price sensitive information to the market must be done by the ASX before any other person. Once ASX has given the confirmation, all information disclosed will then be placed in the website. In terms of market rumors and speculations, it is a general rule that entities are not to comment on them unless the ASX requires it. A trading halt may be requested by the company so to prevent the trading of its securities by an uninformed and inefficient market. The trading halt process will be arranged by the Company Secretary and consulted with the Board (2005).
One-to-one of open briefings with institutional analysts and investors are often conducted by the entities. The ASX Listing Rules however indicate that during such briefings, price sensitive information is not to be disclosed until they had been officially disclosed to the general market. Should there be questions raised during the briefing which can only be answered by price sensitive information, the employees of the involved company must refrain from answering the question or take not of the question and have it checked first with ASX before providing a response. If undisclosed price sensitive information is disclosed during a briefing, this must be reported right away to the Company Secretary who in turn will release the information to the market through the ASX (2005).
When the Company Secretary is uncertain whether the information is price sensitive or not, consultation with the General Counsel, Chief Financial Officer and Managing Director must be done. The failure to follow the general rules of the ASX with regards to the disclosure of price sensitive information may result to the breach of applicable legislation. In turn, this may cause personal penalties for officers and directors. Disciplinary actions are also taken when any part of the policy is breached. In serious cases, dismissal can also be granted for the same reason ( 2005).
Profit Downgrade and Telstra
In 2005, the Australian Financial Review (See Appendix A) released an article stating the fall of Telstra’s shares through its barrier; investors on the other hand continue to leave the company resulting to Telstra’s profit downgrade. Based on analysis, the fall of the company’s shared to .94 will result to the termination of its capital return plan, dividend limitation and downsizing, leading to 12,000 job loss rate for the coming years. In order to restructure the company, Telstra would have to enhance its networks, a project requiring billion. , Chief Executive of the company, announced to the market that Telstra’s EBIT or earnings before interest and tax would drop to 25 to 30% during the financial year. The fall was inevitable even without the inclusion of the redundancy payments.
Based from the details provided in the announcement, this has been initiated by the announcement of the Australian Stock Exchange. The information disclosed in the announcement can be considered as price sensitive since the fall of the company shares can affect the decisions of the investors; most importantly, such information will directly affect the value or price of the securities. Though there had been no indications that provisions of the Australian Stock Exchange in line with disclosures had been breached in the article, certain published articles indicated that the company has violated some of the cited disclosure regulations. According to the statement of the Australian Securities and Investment Commission (ASIC), Telstra committed a technical breach of law due to its provision of private briefings. In addition, ASIC stated that the company had connected the cost of regulation to a profit downgrade in a manner that could have been confusing to small retail shareholders.
Sainsbury (2005) noted in his article that Telstra’s chief executive officer, along with his henchmen, are under investigation and could possibly be imprisoned. ASIC basically suspect the company and its top executives of continuously violating ASX’s disclosure regulations, which are applicable to listed entities. The violations are mainly characterized by the conduction of secret briefings where price sensitive information are given to the ministers of the Australian Government and the press; these had been done a few weeks before informing the ASX of a profit downgrade. Details of this claim were submitted to the company’s largest stakeholder, the Australian Government. The regulator however, indicated that no disciplinary actions would be granted against the telecommunication company in spite of its failure to properly make a disclosure to the general market (Charles 2005).
Stock Price Movements and Profit
Based on the stock prices of Telstra during its announcement of profit downgrade in 2005, indeed, there has been notable reduction in its price target of (See Appendix B). From January to March of last year, the stock prices of the company have constantly increased. However, the months of April and May of the same year showed signs of decrease. Telstra’s stock prices continuously fluctuated in the following months up to October 2005. In November and December of last year, Telstra had finally gone below its price target, which is also the same period when the company announced the profit downgrade. This then suggests that there is a close connection between the share price, profit and the stock price reaction. Several literatures had indicated this relationship.
The academic literatures propose two basic claims on the relationship of stock prices with that of profit or earnings. In particular, there are academics who claim that the relationship between these two factors is weak, while others indicate a positive correlation. Some authors believe that the usefulness of the information found within the accounting earnings is not as strong. Specifically, academics stated that the latitude provided to the management and accountants in choosing between competing convention relevant to earning reports and the unsuitability of certain accounting conventions enabled the inclusion of variances and inaccuracies to reported earnings, reducing the quality of accounting earnings information considerably.
This claim has been supported further by empirical researches which concluded that unexpected changes in accounting earnings and stock price reactions show an insignificant relationship (Lev, 1989). Lev (1989) further noted that the correlation between stock returns and earnings is low and at times negligible; this conclusion implies that the effectiveness of annual and quarterly earnings to investors is minimal only. Some academics have noted that the insignificant relationship between stock prices and profit identified by other researchers are attributable to the studies’ failure to use and analyze an appropriate model that will identify the factors’ relation.
A specific model, known as the Ohlson model (1991), indicated that at a constant rate, stock price movements can represent the capitalization of earnings. Basically, the Ohlson model suggests that the total of the company’s common stock price by the end of the year as well as the dividends declared by the company on the same year can be denoted as the firm’s capitalization of the earnings for the year. This can be computed using the formula P 1+ dit+ = Kit+ e 4. This theory has been tested by (1991). The model tested in the researchers’ study was linear and has an additive error term which is distributed normally.
It should be considered however, that there are partial truths to Lev’s initial claims where stock prices are insignificantly related to the capitalization of earnings. For instance, in the case of a company that is encountering losses, the presence of positive equity valuation makes stock prices an ineffective indicator for capitalized earnings. In addition, it has been hypothesized common stock valuation in companies that are experiencing positive income below a certain level can be influenced by several factors. These include potential or actual tender offers and liquidation value. In this case, considering that the earnings of the company is not affected by the price of the common stock for that year, the change in the in the company’s stock price for the same and subsequent years should not be affected by the earnings of that year.
These academic researches then suggest that while stock price movements may represent profit or earnings, the trend is a case to case basis. In the case of Telstra, the stock price movements observed for the last two months of 2005 may have been below the stock price target and suggest low company earnings for the coming years due to the profit downgrade. This then suggest that the announcement of the company was done on a timely basis. Nonetheless, it is still essential that further investigations are done for other cases that undergo unusual stock rice movements or profit downgrades.
Conclusion
Based from the provisions developed by the ASX, disclosures are an important economic matter that must be supported by standard regulations. This paper cited various sections of the Listing Rules, tackling the different conditions involved in making disclosures of price sensitive information. Sanctions for the violation of these developed policies are also implemented. The discussion of the Australian disclosure regulation had also mentioned the significant role of the companies’ top management in determining price sensitive information and in informing the market through proper disclosures. In the case of Telstra, the company has recently announced a disclosure regarding its falling shares, resulting to profit downgrade.
The disclosure has been delivered through the confirmation of the ASX; nonetheless certain organizations claim that the company has violated the rules of proper disclosure, implying that the company had conducted secret briefings with its major shareholder before its formal announcement to the market. The issue appears to be negatively influenced by the fact that the Telstra’s major shareholder is the Australian Government; hence, report indicated that proper investigations or actions for the company’s violation were not done accordingly.
Analyzing the stock prices of Telstra and its announcement of profit downgrade suggest that there is a direct correlation between earnings and stock price movements. However, academic researches noted that while there may be a relation, certain factors can still make the relationship of these two factors insignificant Thus, it is essential that proper investigations are done for such situations as the reaction of the stock price and its ability to represent earnings is a case to case basis.
Word Count: 2,200
APPENDIX A: Telstra and Profit Downgrade
Telstra shares fall through the .00 barrier
Nov 16, 2005
Australian Financial Review
Telstra’s shares plunged through the barrier on Wednesday as investors continued to desert it following Tuesday’s profit downgrade.
Telstra shares sank as low as .94 after yesterday’s marathon strategy review that outlined a massive restructure of the company that will see the cancellation of the company’s capital return plan, the capping of its dividend and the loss of up to 12,000 jobs over the next five years.
Its shares were cut to “underperforms” from “market perform” at Goldman Sachs JBWere, and to “underperforms” from “neutral” at Macquarie Equities on Wednesday.
As part of the restructure, Telstra will spend billion to upgrade its networks. To fund the higher spending, it canceled the third installment of a .5 billion annual capital return plan and will cap its dividend at 28¢ a share for the next three years.
Chief executive Sol Trujillo told the market on Tuesday that earnings before interest and tax (EBIT) for Australia’s biggest telco would fall by as much as 25-30 per cent this financial year, including redundancy payments.
He said that even without the redundancy payments EBIT would fall by 19 to 24 per cent, more than the 7-10 per cent drop the company flagged in August.
, an institutional dealer at Aequs Securities, expects Telstra shares to fall as low as .60.
The stock was at .99, down 3¢ at 1046 AEDT.
“It’s fought back to .99 which surprises me because I would have thought every man and his dog would want to get out of it now,” said.
Source: 2005
APPENDIX B: Telstra’s Stock Price Movement Data
Date
Open
High
Low
Close
Avg Vol
Adj Close*
5-Dec
3.84
4
3.75
3.93
25,037,902
3.93
5-Nov
4.22
4.38
3.85
3.85
47,550,567
3.85
5-Oct
4.07
4.27
4.03
4.21
31,052,065
4.21
5-Sep
4.69
4.7
3.99
4.07
60,258,999
4.07
5-Aug
5.06
5.09
4.66
4.68
41,074,800
4.68
5-Jul
5.07
5.17
4.91
5.07
20,724,312
5.07
5-Jun
5.02
5.18
5
5.06
21,974,826
5.06
5-May
4.86
5.07
4.75
5.02
17,295,904
5.02
5-Apr
5.12
5.14
4.81
4.84
21,788,417
4.84
5-Mar
5.27
5.5
4.98
5.09
27,121,186
5.09
5-Feb
4.96
5.35
4.94
5.26
23,149,634
5.26
5-Jan
4.91
5
4.81
4.94
17,966,108
4.94
4-Dec
4.9
4.92
4.89
4.91
7,032,012
4.91
* Close price adjusted for dividends and splits.
Source: 2006
Credit:ivythesis.typepad.com
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