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Good investor relations don't help in a crisis, says research
Report assesses impact of IR on stock price. By Louise Ross, accounting specialist, CIMA.
Companies with good investor relations (IR) lose relative market value during market crises. That was the provocative conclusion of interim findings of a report called 'The fragile returns to investor relations: evidence from a period of declining market confidence' by K Peasnell, S Talib and S Young from Lancaster University. This flies in the face of the accepted wisdom that IR have a positive role to play during slumps.
The researchers presented their findings at the recent Cardiff Business School Financial Reporting and Business Communication Conference. They said they started this project because there is only limited and inconclusive research about the impact of investor relations on the capital market. Therefore they aimed to improve understanding of the role of investor relations and assess its impact on the valuation of a company's stock. They examined the movements in market valuation of over 100 US companies which had won awards for their good IR practices. This was compared to a control company which was similarly sized and in the same industry.
The researchers said regulators think of IR as a neutral process, solely about providing information. But a survey of large US corporations has shown that senior management sees IR as a means to enhance share price and achieve fair market valuation. Several other research studies illustrate how investor relations:
- help increase analyst coverage
- boost stock prices
- improve investor awareness and therefore trading activity and
- help share prices reflect fundamentals more accurately.
Other research was cited on the impact of introducing IR activity, whether in-house or using a consultant. This shows that IR significantly increases press coverage, corporate disclosures, trading activity, analyst following and institutional ownership. Good IR are associated with earnings forecast accuracy and with less dispersion of forecasts. Research was also mentioned about which organisations were more likely to have IR officers; and how important IR was considered to be by European companies.
Shake in confidence
According to accepted wisdom investor relations are 'a good thing'. However, other research also shows more scepticism about the value of IR as a source of information. Many consider the increased volume of disclosures prior to share offerings to be merely hype. There is no evidence that companies with good IR find they lead to lower cost of capital.
Peasnell, Talib and Young's research studied activity during October 2001 to September 2002 - a period of market negativity. Investor confidence had been shaken by a succession of accounting scandals including Enron, WorldCom and Tyco. They cited academic and other surveys from the UK showing that confidence had suffered. Improving investor confidence was important and IR had risen to the challenge and had improved in the period 2001-2003.
However, this team's preliminary research findings suggest that 'good' IR companies experience a relative decrease in their market value on certain significant days, compared to the control. They said this shows that the decrease in investor confidence also damages confidence in IR. This goes against anecdotal evidence suggesting that IR has a positive role to play during market crises.
For a hard copy list of the references from this presentation please send your name and address to tim.cooper@cimaglobal.com.
If you have a specific information need in this or any other area, you can ask CIMA's Technical Information Service to do a literature search. E-mail tis@cimaglobal.com. Since last month you can now search thousands of journals yourself on the comprehensive Business Source Corporate on-line service, offered free to all CIMA members.
August 2005