The Supply and Effectiveness of Investor Relations in Insider- vs. Outsider-Oriented Markets

Abstract

Using annual survey-based investor relations (IR) data for a panel of European companies, we document that the supply and effectiveness of IR varies with country- and firm-level demand. Relative to their industry peers, firms from insider-oriented countries have larger IR staff, which predicts better IR rankings. Better IR is associated with greater visibility, information assimilation, and valuation, with visibility and assimilation being significantly greater for firms from insider-oriented countries. Within such countries, firms with greater outsider orientation have higher capital market benefits. Furthermore, using Markets in Financial Instruments Directive II as a shock to analyst coverage, we find an incrementally larger association between IR and visibility in insider-oriented countries after 2017. Overall, the evidence suggests that the supply of IR in insider-oriented markets has reached a high level, acting as a viable mechanism to improve firms’ information environment. However, within those countries, IR demand still varies significantly, with outsider-oriented firms showing greater IR effectiveness. This paper was accepted by Brian Bushee, accounting.

The value of communication: Evidence from in‐depth investor relations management data

“…In summary, the relationship between firm value and IR remains unclear. IR measures typically use outside consultants or NIRI members (Bazhutov et al, 2022; Brown et al, 2019; Bushee & Miller, 2012; Chapman et al, 2019; Karolyi et al, 2020; Kirk & Vincent, 2014; Solomon, 2012). These indirect measures have limited explanatory power for IR activities and do not provide direct evidence on how companies achieve increased market value in the investor communication process.…”

“…Regarding the economic consequences of IR, existing research focuses on its role in capital markets, where good IR can help firms in terms of information disclosure (Bushee & Miller, 2012), analyst tracking (Kirk & Vincent, 2014), institutional investor shareholding (Agarwal et al, 2016), market liquidity (Karolyi et al, 2020), and market valuation (Bazhutov et al, 2022; Reiter, 2021). Chapman et al (2019) indicate that companies with IROs exhibit less stock price volatility, lower analyst forecast dispersion, and faster price discovery, suggesting that IR management can help market participants better understand company information.…”

“…3 These records enable us to accurately measure IR and conduct an in-depth analysis of the IR management process, providing a setting to investigate how IR can specifically enhance corporate value through communication. Moreover, compared to capital markets in developed countries, IR can significantly reduce information friction in developing countries, where information opacity is higher, and securities markets are poorly efficient (Bazhutov et al, 2022;Karolyi et al, 2020).…”

“…Existing IR measures focus on a firm's overall situation, including hiring outside consultants or NIRI members or the presence of dedicated IR personnel in the minutes of earnings conference calls (Bushee & Miller, 2012; Chapman et al, 2019; Kirk & Vincent, 2014; Solomon, 2012), or through research and interviews that reveal the IR specifics (Bazhutov et al, 2022; Brown et al, 2019; Karolyi et al, 2020). However, these measures are relatively nascent.…”

Investor relations under short‐selling pressure: Evidence from strategic signaling by company site visits

“…The globalized financial markets acknowledge that IR activities have become increasingly important in the past decade (Karolyi et al, 2020). Meanwhile, the adoption of IR strategy varies significantly across firm characteristics, industries and countries (Bazhutov et al, 2022). To further explain the variation of corporate IR activities, more understanding is needed of firms' objectives and incentives on making substantial IR efforts under different external circumstances such as regulatory changes and institutional evolvements, especially in emerging financial markets.…”