It’s a well-known fact that investor relations, or any marketing service, is the first thing to get dropped by listed companies looking to save money and cut spending during a market downturn.
So this begs the question – what’s the value of investor relations for listed companies?
The investor relations (IR) industry has developed substantially over the past few decades, primarily driven by a growing demand for firms to provide a higher degree of information transparency and accountability to multiple stakeholders.
However, despite greater importance now placed on IR activities by listed companies, very little attention has been paid in the finance literature as to whether an effective IR strategy enhances shareholder value as asserted by industry practitioners. What follows is our summary of the available literature.
The Research On Whether Investor Relations Adds Value
Investor Relations, commonly known as “IR”, aims to manufacture and maintain strong relationships with a company’s existing and potential investors.
The National Investor Relations Institute (NIRI) defines IR as “a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.”
The argument “for” investor relations is that it results in a combination of enhanced visibility and reduced information asymmetry which contributes to the fair valuation of firms.
Experienced IR professionals are able to build the profiles of management teams, secure stockbroker coverage, book meetings with institutional investors, assist with access to capital, secure media coverage… the list goes on. Many of these activities are conducted off the back of the IR professional’s personal network and relationships and are therefore hard to replicate by those who are less experienced in this field.
In a peer reviewed research report the proposition that IR leads to the “fair valuation of firms” was tested, as well as whether effective communication of firm-specific information enhances firm value.
The study found that firms perceived by investment professionals as having superior IR have:
- Increased analyst following
- Improved liquidity
- Positive abnormal returns and significantly higher valuation multiples within the Ohlson (1995) framework
The study also found that effective investor relations successfully reduced risk to investors associated with high information asymmetry.
The findings are strongest for smaller firms which are more likely to be ‘neglected’ by the investment community (i.e., small cap companies who lack research coverage).
This study is supported by more recent research from Grensing-Pophal (2006) which found that companies with effective IR benefit from a 29.5% increase in market value versus companies without IR.
A study by Zerfass & Volk in 2018 followed up Grensing-Pophal’s findings, reiterating that that “quality external communications can attract potential investors, resulting in greater ability and ease in raising equity.” Indeed, in the work we do at Investability, attracting investors and increasing a company’s ability to raise capital are among the most valuable services we offer. Often it takes just one investor to substantially change the course of a company’s valuation.
The study also concluded that firms with effective communication were more likely to report lower employee turnover than their peers. With lower turnover, there is a savings on recruitment, hiring, and onboarding costs.
Furthermore, a study by Zerfass & Volk (2018) found that quality external communications can entice potential investors, resulting in greater ability and ease in raising equity.
Five Ways Investor Relations Adds Value
- IR builds and maintains shareholder confidence
- IR assists in attracting retail and institutional investors
- IR provides a direct, two-way channel of communication between a company and its investors, contributing to increased investor understanding and positive investor sentiment
- IR improves a company’s ability to access capital
- IR helps companies receive a higher market valuation
Investability is a leading Sydney-based investor relations and corporate communications firm, servicing clients across Australia and internationally. Our strategies are informed by our depth of technical experience in capital markets and are based on our practical knowledge of what really works from years of working with institutional buy-side and sell-side clients alike. This, and our command of two seemingly incongruent disciplines, communication and finance, is what sets us apart in our investor relations and capital market dealings.
Get in touch with Investability today and find out how we can help your business with strategic investor relations services.