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This Friday, the Luc Beauregard Centre of Excellence in Communications Research welcomed Professor François Brochet from Boston University who presented a study on investor relations (IR). IR are important as firms have many different investors (e.g., retail investors, institutional investors including hedge funds, pension funds, ETFs). Firms communicate with these investors by disseminating mandated and voluntary disclosures, interacting personally with them, and facilitating access to management during events like one-on-one meetings.
From an economic perspective, IR are driven by firms’ desire to reduce the gap between the information that they have and the information that investors have. Reducing this gap implicates offering new information to investors about the firm and its operations and clarifying what the firm is doing.
IR are primarily an Anglo-Saxon tradition, and it occurs in countries with shareholder-oriented markets where diffuse share ownership creates the need for systematically communicating with investors. Anecdotal evidence suggests that IR is becoming more important in countries that do not have a shareholder-oriented market tradition.
Professor Brochet’s study explores the benefits of IR. It compares two countries: the UK, where firms receive a lot of their funding from shareholders and where shareholders often have small stakes; and Germany where firms traditionally have been funded by banks and where shareholders typically are few and have high ownership stakes. In countries like Germany, firms have historically been less transparent about their operations in their disclosures and have held fewer one-on-one meetings with investors than in the countries UK. Also, in countries like Germany, investors have been less protected by the law.
Professor Brochet’s study shows that, in Germany more than in the UK, IR of high quality are beneficial for the firm: firms with better IR quality are more visible (e.g., attract more analysts) and more highly valued (e.g.., they have a lower cost of capital). The measure of IR ranking used in the study includes overall quality of service, website and webcasting, one-on-one meetings, non-deal roadshows, annual reports and formal disclosures, proactivity of senior executives, and business knowledge of IR team.
The result from the study suggests that a firm’s investments in IR yields larger benefits in countries like Germany than in countries like the UK; firms that invest in IR stand out more clearly in countries like Germany where the IR market is less developed, less taken-for-granted and less competitive than in countries like the UK.
In a nutshell, IR are particularly beneficial in countries that do not have a tradition of of shareholder-oriented markets where there are still large information gaps between firms and investors.
Photo, without changes, from Mike Lawrence