IN WHAT is thought to be the first academic study to show that effective investor relations has a clear market impact, researchers have found that companies nominated in the US IR Magazine Awards earn unusually high returns both before and after the awards.
And the researchers — Vineet Agarwal of Cranfield University, Angel Liao and Richard J. Taffler of University of Edinburgh, and independent researcher Elly Nash — find that liquidity of smaller nominated firms increases significantly in the year after they are nominated.
However, they find that there is no increase in analyst coverage for either large or small-cap firms in the year after they are nominated in the awards. In fact, large-cap companies in the study, which were drawn from firms nominated for “Best Overall IR” by IR Magazine over the period 2000 to 2002, saw analyst coverage drop after their nominations.
The researchers also find that nominations for the awards may be influenced by past performance and that companies with higher levels of analyst coverage get more nominations, suggesting that analysts tend to favor the stocks they follow.
Here are two paragraphs from their conclusions:
We find that nominated firms have higher abnormal stock returns over the year immediately preceding the nominations, and that firms with higher number of nominations have higher past abnormal returns suggesting past performance drives the nominations. However, we also find that this outperformance continues over the subsequent year, though it is much smaller, suggesting that the market is unable to price this information efficiently. We do not find any evidence that effective IR increases analyst coverage by reducing the time and costs of analysing information for analysts and increased demand for analysts services from investors. However, consistent with behavioural finance theories that suggest effective IR can enhance the “availability” of a stock and cause decision makers, such as security analysts, to favour a firm, we find firms that receive nominations tend to have higher analyst following.
Consistent with information risk and agency theories that predict reduced perceived information risks due to effective IR leading to lower transaction costs on the basis that trading volumes increase, and “agency costs” for stockholders, we find a significant increase in liquidity of the small nominated firms. In summary, we find firms nominated for IR awards which proxies for effective IR strategies have higher market values. We conclude that, consistent with information and agency cost theories, effective IR has clear market impact. We believe this is the first study in the literature to have demonstrated this.