During the stock market mania, Internet message boards earned a reputation as breeding grounds for stock touts. Stock promoters no longer needed to rent offices with banks of phones to profit by manipulating shares. An Internet connection was all the pump-and-dump guys required.
But an academic study to be published this fall in The Journal of Investing indicates that chat rooms can also contain valuable morsels for investors.
The study, by James Felton, associate professor of finance at Central Michigan University, and Jongchai Kim, an assistant professor there, examined messages posted on the Yahoo board devoted to Enron starting in 1997. They found that anonymous postings on the message board presented a compelling history of the company, described a disturbing corporate culture there and repeatedly warned investors to get out while the getting was good.
On April 12, 2001, with the stock at US$57.30, one message predicted that Enron would soon be revealed as a house of cards. "The Enron executives have been operating an elaborate con scheme that has fooled even the most sophisticated analysts," the message said. "The first sign of trouble will be an earnings shortfall followed by more warnings. Criminal charges will be brought against ENE executives for their misdeeds. Class action lawsuits will complete the demise of ENE."
But messages posted even earlier also indicated trouble ahead. On March 1, 2000, with the stock at US$69, a participant wrote: "Dig deep behind the Enron financials and you'll see a growing mountain of off-balance-sheet debt which will eventually swallow this company. There's a reason they layer so many subsidiaries and affiliates. Be careful."
In October 1998, a message said that under Kenneth Lay, Enron "developed a flashy reputation."
It also said: "He has not delivered value. His management team is smoke and mirrors."
Happy Enron shareholders shared their views as well. In January 2000, one chatter put a US$1,000 target on the stock; it closed at US$61.25 that day. But Felton didn't tally the number of bulls and bears; the task was just too onerous.
The most common warnings related to the significant insider sales by Enron executives, but other comments involved suspicions about the company's opaque financial statements. On June 17, 1998, JanisJoplin298 wrote that Enron's financial structure was highly complex. The company "could just as easily bring greater shareholder value by simplifying the capital structure and clearly articulating its deals," the message said.
To which came this reply: "If you find ENE's structure too complicated, Janis, then maybe stocks aren't for you. Anybody with even the most rudimentary understanding of accounting shouldn't have a problem with it."
Felton, who edited the messages for clarity, said they prove that the fall of Enron did not come without warning, contrary to claims of the Wall Street crowd. "Here you have these people posting on the message board while all the Wall Street analysts are upgrading the stock," he said.
Indeed, on Oct. 28, 1999, this message appeared: "Look at the lease obligations in the footnotes of the 10-K. There are a lot of liabilities that are not included in the balance sheet numbers."
Add these liabilities to the balance sheet and "you might think a little differently about the valuation of ENE."
It is impossible to say who was behind the postings. But Felton said message boards pose a problem for regulators and companies as well as an opportunity for investors willing to slog through Internet verbiage.
"What's interesting about this is we have inside information that is anonymous but publicly available, and it's not factored into the stock price," he said. "Companies are being very careful about what information they release to the public, but that doesn't mean their employees aren't talking."
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