Federal impasse could crush investor confidence, survey shows

The federal government shutdown and the lack of congressional agreement on raising the debt ceiling have the potential to crush investor confidence, according to a new Center for Audit Quality (CAQ) survey.

If the shutdown lasts another week, investor confidence in U.S. capital markets would shrink to 60% from 69%, according to a “pulse” survey of 424 respondents performed for the CAQ Oct. 3–6.

If Congress fails to raise the debt ceiling and the United States defaults on its debt obligations, confidence would fall to 39%.

In August, 69% of investors participating in the CAQ’s 2013 Main Street Investor Survey expressed at least some confidence in U.S. capital markets,  the highest percentage since 2009 and up from 65% last year.

The shutdown did not immediately scare off investors, as the pulse survey indicated 69% confidence shortly after the shutdown began. But a prolonged impasse would erode confidence in U.S. capital markets, the survey shows.

“This new data shows just how high the stakes are for the country and our capital markets if the U.S. defaults,” CAQ Executive Director Cindy Fornelli said in a news release. “We’ve not seen investor confidence in the U.S. capital markets fall below 60% in the seven years we’ve conducted our survey, including in 2008 at the height of the financial crisis. Staring at the real possibility that confidence dips to 39% if the U.S. defaults should be an incentive for policymakers to resolve this situation.”

The CAQ is affiliated with the AICPA.

In the August telephone survey of 1,013 investors, confidence investing in U.S. public companies rose to 79%—its highest level in the six years the question has been asked in the survey, and up from 71% the previous year. Investors’ confidence in audited financial information also grew—to 72% from 69% in 2012 and 2011.

The quality of a company cited as most important in investors’ decisions is the sector or industry in which it operates—which was cited by 44% of respondents as an essential factor in future investment decisions. Other top factors were whether a company has sound corporate governance in place (43%), the company’s strengths and weaknesses (42%), the company’s strategy for future growth (41%), and the outlook for the industry (41%).

Investors showed a much greater interest in social responsibility than executive pay. While 40% said whether a company operates in a socially responsible or environmentally friendly fashion is essential to their investment decisions, just 16% rated CEO compensation as essential.

“The results suggest that a more socially conscious and connected generation of investors seems to be emerging,” Fornelli said in the introduction to the survey.

More than seven in 10 (72%) of respondents said they have confidence in independent public auditors, who topped the list of groups investors trust to protect their interests. That’s up from 70% in 2012 and 67% in 2011—the first year the question was asked in the survey.

Financial advisers and brokers (69%), independent audit committees of publicly traded companies (69%), financial analysts (65%), and investigative journalists (62%) round out the top five entities investors trust, according to the survey.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.