Accounting

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Journal of Financial Economics 38 (1995) 11 l-140

Fhancd ECONOMICS

The challenges of investor communication The case of CUC International, Inc.

Paul M. Healy”, Krishna G. Palepu*,b

“Sloan School of Management, Cambridge, MA 02139, USA “Harvard Business School, Harvard University Boston, MA 02163, USA (Received September 1992; final version received August 1994)

Abstract We examine investor communication issues using the experience of CUC International. CUC had difficulty convincing investors that its marketing outlays were

profitable investments,leading to stock misvaluation over an extended period. To resolve this problem, CUC adopted an accounting change and then underwent a leveraged recapitalization. Subsequently, it accelerated recap debt repayments and initiated a stock repurchase. CUc’s experience suggeststhat accounting

reports are not always effective in investor communication. While financial signals are more effective, their impact is not as immediate as predicted by prior research. The CUC case suggests that investor communications is a rich area for future

research. Key words: Investor communication;Accounting; Financial policy JEL classification: G31; G32; G34; G35

*Corresponding author. We thank the participants of the Financial

Decisions and Control workshop at the Harvard Business School, accounting workshops at Northwestern University, Cornell University, and Stanford Summer Camp, the Corporate Finance Workshop at the National Bureau of Economic Research, Andrew Alford, Mary Barth, Ravi Bhushan, Stuart Gilson, Michael Jensen, Bob Kaplan, Richard Ruback, Doug Skinner, Ro Verrecchia, Jerry Zimmerman, and an anonymous referee for comments on an earlier draft of the paper. We would also like to thank Stuart Bell (CFO) and Stephen Greyser (Director) of CUC for helping us with this research. This research is funded by the Division of Research at HBS and the International Financial Research Center at MIT....