Busi 353 Capital Markets

Busi 353 Capital Markets Assignment

The article “Google: Too much information?” brings to light two main issues that analysts are facing with Google’s management; the first being high information risk and the second being a high perception of information asymmetry between management and investors.

Information Risk

Google is famously known for not giving earnings and sales guidance which has resulted in analysts becoming frustrated with the company and labeling it as a one with high information risk. Prior to its release of earnings in January 2006, Google had a wide berth of trust due to the fact that they had consistently beat earnings since their initial public offering. As a result of the January 2006 earnings miss, analysts and investors have become increasingly frustrated with Google which they have taken out by punishing the stock severely. Google no longer has a berth of trust as large as it once had and is being pressured more and more to disclose information. As analysts of Google currently have little information in predicting future earnings/cash flow, there is an increased likelihood that they will create unrealistic expectations resulting in a higher probability that Google will miss earnings targets and will carry an increased risk perception. The result is that Google investors have high information risk which tends to increase the required rate of return which results in a lower share price in the long term. Information risk also creates greater volatility in a company’s share price. The competition of Google, Yahoo and Interactive Corp, does provide information to analysts and investors regarding sales and earning figures resulting in a higher degree of trust of management in these companies which reduces their required rate of return and increases their share prices in the long term. The result is that Google is perceived as a riskier investment and should trade at a discount relative to its peers in the long run which is not necessarily the case currently due to its various competitive advantages. Analysts are also looking to Google to provide some indication as to capital expenditures to enable them to analyze future growth opportunities and potential competition pitfalls. For example analysts are speculating that Google may create its own finance site to try and become a true portal like Yahoo. Google’s lack of capital expenditure guidance appears to be for competitive reasons.

Google may not provide adequate disclosure to analysts for a variety of reasons. The main reason one can speculate is due to proprietary and competitive reasons. Google is a growing company in a large growth market that would like to monetize its opportunities before its competitors without feeling pressure to meet earnings guidance on a quarterly basis. Google’s stock is viewed as being extremely volatile and should not be considered as a potential investment for conservative investors which appears to go along with Google culture.

Information Asymmetry

The article alludes to the presence of information asymmetry that exists between management and investors specifically relating to adverse selection. George Reyes, CFO of Google, speaking at a Merrill