On January 8, Gotham City Research, known for its bearish investment strategy and uncovering fraud in the past, announced that it would publish a report on a publicly traded Spanish company.
The next day, they revealed that they were referring to Grifols and accused it of manipulating its profits and financial situation to hide a larger real debt than declared.
In its report, Gotham suggests that Grifols stock is overvalued by between 34% and 75%, although under certain assumptions of increased financing costs as a result of higher real debt, its value would be zero.
The market reaction was drastic and Grifols shares fell by around 30% in one day, although they recovered some of the lost value. The company has rejected these allegations, calling the information in Gotham’s report biased and speculative.
On the other hand, this stock market disaster allowed Gotham to speculate on Grifols shares and earn around 20 million euros on the same day the report was published.
Errors in the accounts?
The transactions described in the Gotham report have been audited by KPMG (a leading auditor), appear in reports published by Grifols since 2018 and have been reported to the CNMV, so the existence of fraud as such is not obvious.
What can be seen from the information provided by Grifols is that for some years the company has been implementing practices that make it difficult to understand, even to the expert eye, the corporate structure and operations linked to Scranton.
Academic research in finance gives us some clues about companies’ incentives to maintain non-transparent financial information. It is known that accounting transparency is essential to reduce information asymmetries between managers and investors, this being fundamental to protecting the interests of the latter.
However, it has been observed that companies with higher debt, poorer performance and financial constraints tend to be more opaque.
Grifols has seen significant increases in its debt in recent years, leading several analysts to consider it overleveraged. The latter could have been an incentive for Grifols to use more opaque structures with the aim of distorting the perception of their financial health, increasing information asymmetries.
What interest does Gotham have in publishing this information?
Short investorsbass players), as Gotham was in this case, are investors who take positions hoping that a stock will lose value. To make money, they borrow shares of a company to sell immediately at the market price, hoping to repay the loan after purchasing those shares in the future at a much lower price.
This form of investment has made them very controversial players on the markets. There is a tendency to think that bears have incentives to falsely smear companies to profit from falling prices. However, the evidence provided by academic research attributes them a valuable role, because their presence contributes to making the financial information reported by companies clearer and more reliable and to improving some characteristics of the functioning of the markets.
While not free from controversy, the Bears have gained fame for uncovering flagrant irregularities in the past, such as the Enron case in 2001.
Likewise, it is interesting to note that these types of investors have little interest in their news being completely false, since they can lose a lot of money if their accusations are found to be wrong and the shares of the company in question end up rising. The credibility gained by bearish Gotham by correctly interpreting other reports may explain the market’s immediate reaction.
What does this event teach us?
The comparison between Grifols and Gotham is an interesting case on information asymmetries, the importance of clarity of accounting information and the role of bears.
Even if it is possible that we are not faced with a fraud, Gotham seems to have highlighted some aspects which, although known, increase the information asymmetry between the company and investors, which may have triggered mistrust on the part of some shareholders who decided to sell their stock until you have a clearer view of the company.
This article was originally published on The Conversation. Read the original.
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2024-01-20 04:21:00
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