Financial Directions - Volatility of big business exposed

The study* by Ernst & Young and Oxford Metrica tracks share price movements of Global 1000 companies over the past five years and analyses why companies experience sudden, major losses or gains in market value. The analysis concentrates on the top 100 increases or decreases relative to the market.

The survey found that, of the companies exhibiting the largest swings in value, 75% experienced an increase in share value of over 30% in their best-performing month, and a quarter outperformed the Global 1000 by over 50% in a single month. Two-fifths of the largest negative swings were losses in value of over 30% in their worst-performing month, and one-in-twenty under-performed their index by over 50%.

The larger (Global 500) companies surveyed experienced two-thirds of the total negative value shifts encountered. Two-thirds of positive value shifts originate from the smaller companies (Global 751-1000). “Clearly, it is easier for a firm to generate $1.2bn in value (30% of $4bn at the smaller end of the portfolio) than it is to generate $120bn (30% of $400bn at the larger end). For larger firms, it appears much easier to lose substantial value,” the survey says.

The study found that the majority of events surrounding value shifts (positive and negative) were strategic in nature. The factors that had a positive effect on share price were: strategic alliances; mergers and acquisitions; investment in research; and confidence in the management team’s ability to execute core business processes. Driving the negative shifts were: failure to adapt to a changing business environment; customer mismanagement and poor investor relations.

The IT sector contained by far the most volatile value shifts. Ernst & Young claims the future cash flow of IT companies is difficult to predict because of their products short lifecycles and their treatment of future share options. It suggests that rapid corrections in market valuation tend to be due to a subjective element in pricing and that value can be eroded as quickly as it is established.

The materials and energy sectors do not figure significantly in the top 100 movers. Ernst & Young claims this is due to companies in these industries generally being well established, with a long track record upon which analysts can base performance predictions.

US companies experience the greatest value shifts, especially negative ones, while French and German companies are barely represented in the top 100 companies. It is suspected that French and German cross-shareholding structures restrict the ability of their stock markets to respond as quickly as the US market.

* Risks that matter – Sudden increases and decreases in shareholder value and the implications for CEOs can be downloaded at https://www.ey.com/ global/content.nsf/UK/Issues_Perspectives.