Understanding the Role of Management in Investment Decision as Qualitative Variables

Effective management is a key factor in the performance of any organization. Managerial analysis, as qualitative analysis, is the most valuable tool in decision making which applies to every institution. Several qualitative indicators can jointly produce some guiding indications to evaluate the management soundness. The managerial analysis using qualitative characteristics and various other factors of the organization provides the true picture of the context and the reality of the ongoing phenomena in the real place. Managers cannot just need to wait for the quantitative factors, produced in numbers, to make rational decisions including asset acquisition in the stock markets.  

Predicting stock accurately is regarded as one of the most unlikely and a huge challenge even employing big databases and data mining techniques. If we decompose the current stock prices as a representation of current assets prices, it incorporates merely half of the historical information and the asset prices monetize another half with the projections of the future information. In such cases, if we claim, we can predict the stock prices, that is not a fair game but it would certainly give some indications based on the assumptions one can make during the analysis. Thus, understanding the decision-makers' on-time behavior and how the information perceived and processed as a decision is always a unique phenomenon.

Information that can be calculated in the numerical forms like Earning Per Share (EPS), Dividend Per Share (DPS), Debt-Equity Ratio, historical data based average pricing, market risk factor, Beta (B), etc. important in the decision making when we turn into stock acquisition. At the same time, perceptions towards luck, belief in lucky numbers, birthday, day of the week, news and media contents, recommendations by the friends and relatives, an advisory from the industry professionals, etc. are another side of the coin in the decision-making process which has equal importance but in some cases more influential roles in the decision making process. Sometimes, the financial statement depicts the right figure but if management is there involved in insider trading, it may lead to fail the business and cause a decrease in the value of stock overnight. Just we can observe the downfall of reputed business within a certain period because of poor leadership as well as management.

The story of Enron Corporation depicts how a company that reached striking heights comes to the downfall at once. At peak, its shares were valued $90.75; just prior to declaring bankruptcy on Dec. 2, 2001, they were trading at $0.26. It shook Wall Street to its core. It created financial havoc among shareholders that how such a powerful business, at the time one of the largest companies in the United States, just disintegrated almost overnight. It is nothing but poor leadership guided by self motive. It was hard to believe that how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting. Therefore, qualitative analysis sometimes becomes profound along with numeric analysis in the judgement.

Management is like a driving spirit in which the driver's conscience and awareness bring out the possible outcomes leading to positives and negatives results. There could be certain flexibility and dynamism of a driver who can take you to the destination. Same way, the driver’s sense of understanding of others’ moves, speed, and other factors may cause occasional accidents as well which can be seen over in our society quite frequently. Either the driver is a real vehicle driver or the one who drives the team and makes decisions impacting the masses or the driver could be the financial professionals who make the decisions and sets up the fates of their clients.

While we discuss the managerial analysis of any organization, we should be clear on certain factors. For instance, the Chief Executive Officer (CEO) comes in as the first figure as he or she makes or breaks the organizational destiny. There should be mandatory qualifications to be a CEO for instance in case of a financial institution that is set forth by the central bank. The educational qualifications, work experience, values, past performance, relationship with the previous boards, perceptions towards the society such as corporate social responsibility, actions towards environment directly or directly through the businesses he/she promotes during the past works, etc. If we would like to relate this qualitative factor with the stock market, the investor may look at mentioned factors in believing with the organization which is going to be their long-term investment assuming the retirement company! In the ideal context, an experienced, an educated, socially iconic personality, may attract the likelihood of the many investors however some young CEOs with little industry experience but clear vision and insights about the business can also be the alternative to the investors while making judgements towards for the growth of the invested capital. In general, the structure of the organization, reporting relationship, use of authority, and most importantly the business strategy of the CEO would achieve the positive outcomes and take the organization to the path of success.

Besides the CEO, the Chairman of the organization plays a vital role in the smooth functioning of the organization. Positive, mutual, and corrective communication in-between CEO and chairman directs the organization towards the goal achievements. Working together in a common spirit would bring synergic outcomes in the organization. If any conflicts arise between two heads of the organization, it may cause adverse effects in the organizational performance. As suggested by Wu (2008), agency problems may further complicate the valuation of new product introductions. Indeed, there is prior literature that with the separation of ownership and control, managers may make capital and human resource investment decisions for their private interests at the expense of shareholders' wealth (Wei and Zhang 2008). Therefore, overall behavior including the perception of CEO and Chairman about the innovation, use of Research and Development, and the customer-focused orientations are to be analyzed while judging organizations from the qualitative point of view in the investment decision process.

The Bottom Line

In reality, incorporating various qualitative and quantitative variables while developing an investment screening criterion is a challenging task. But, your work in developing such screeners to combine numeric and textual information as a managerial index for your investment decision would certainly add value in your portfolio. As mentioned, managerial index is not so easy to derive however one has to develop a micro sense of understanding the organizational issues as “read between lines”. We are fighting with Covid-19 by staying in a lockdown situation; this could be the best time to work on your investment strategies, ready to be tested when the market resumes its operation.

Binod Ghimire, Ph.D. Assistant Professor, Nepal Commerce Campus