What a week it has been for technology and hardware
equipment supplier Pinnacle Technology. The company, which share price has
received a drubbing from shareholders, released a statement on Tuesday this
week in which they said one of their executive directors had been charged and
arrested earlier in the month on allegations of bribery.
For those of you who haven’t heard about the story I’ll
briefly summarize it. Mr Takalani Tshivhase is alleged to have tried to solicit
a bribe to a senior police official to secure a contract with South African
Police Services. Although Mr Tshivhase
has been released on bail and awaiting to go on trial which is scheduled for
the 24th April 2014, questions have been raised relating to the sale of shares
by Mr Tshivhase prior to the disclosure to shareholders of his arrest. Mr Tshivhase was arrested on the 5th March 2014
yet the company only disclosed this on the 25th March 2014 together
with the fact that he was allowed to dispose of R4 Million worth of
shareholding on the 19th March 2014.
Outcries of insider trading has drawn sharp criticism on the
company’s top management, however management has stepped forward to deny such
claims. Obviously at this time we are unable to ascertain the truth as we need
time for a proper investigation to determine why the events which took place
were allowed and if they fall in line with the rule and regulations of the JSE.
However today's article is not about speculating what the
possible outcomes could be but rather a case study in point of how transparency
affects the confidence of investors and the role the exchange operator plays in
ensuring fair and competent reporting to shareholders.
It is important to note that we are not talking about the
shorter term effects but rather the longer term effects. The reason for this is
that we find that traders tend to create a lot of “noise” or volatility in the
market on day to day occasions. On the counter investors hold for longer
periods, so although traders have the ability to pullback a price, at an
appropriate price level we find investors who will step in and hold the price
at a rational level and provide the vital stability.
This stability creates the right environment for both
traders and investors to create value at buying points. Think of it this way,
if a particular stock was trending upwards, traders would drive the price to a
level which might be seen as overbought causing a reactive impulse to sell
down. However investors who are more fundamental based rather than technical
based will step in at a low point which is higher than the previous low if they
feel that sentiment might change in the near future. The volume at which
investors wish to enter is much larger than the traders and will thus give
sustenance to the stock and allow its price to rise in the long term.
How does this all relate to the above case of Pinnacle
Technology? It’s quite simply, by the company not disclosing information
promptly, it has effectively created pandemonium in the movement of the share
price.
Investors adapt to new information as it becomes present,
but in the case above the information has been held back. The primary
information is quite damaging but it’s the process whereby the board neglected
to disclose information in timeous manner which has such material effect. What has been left behind is a cloud of smoke
and an inability to establish the reliability of any further information
presented. This results in a more speculative stance on the part of investor
which exacerbates the downward pressure on the price.
Traders try to establish a resting point through all the
wild fluctuated movements. Traders in their very nature are most adapted for
volatility, but the tables have turned and now it is the investors who are
creating the volatility. This volatility creates a large confusion around price
discovery. Traders who think they landed a bargain end up being thrown out by
bouts of vicious volatility. The result of this is a destructive value
mechanism rather than a value creator.
We can see the damaging effects a lack of transparency has
on investor confidence. A healthy stock exchange is one in which it prides
itself in openness and fairness. This leads me to my next point of how the
exchange operator has a role to play in bringing investor confidence to market.
The most important participant on an exchange is the public
as they are the source of capital. Without their participation there would be
no market. However the public shareholder is always the last to receive
information which puts them at a disadvantaged position. This is where the
exchange comes in and plays the role of custodian of shareholders rights. The
exchange has the ability to govern strict rules and ensure that all companies
comply thus providing the public with a sense of security.
Non-compliance should yield a company a suspended membership
from the exchange and recourse of negligent actions. The more stringent the
exchange is on its members the less the ability to disguise material effects
away from the public and the more confidence the public has in the exchange.
What is going to be
interesting in the months ahead is how the JSE deals with this particular
company. It’s important from the onset that it sets the precedent as this case
will be closely watched by the public to see what action is being taken against
this company. The best outcome now would be for the JSE to reaffirm investor
confidence and edge closer to reaching the pinnacle of transparency.
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to
follow me on twitter and get the latest updates of news, interesting commentary
and general trends in the market, my twitter handle is @CadeTradeR if you
follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR
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