If you’ve ever found yourself off the IR awards list (or the short list, for that matter) your reaction was probably something along the lines of, “Well, they’re just beauty contests anyway and they really don’t signify much”. I know, I felt pretty much that way when I practiced investor relations on the corporate side. It seems there just were not enough trophies to hand out to all of the campers.
Unfortunately, I’m here to tell you that there is actually academic research that shows that being nominated for investor relations awards can help your stock price.
In a March, 2008 working paper, Professor Richard J. Taffler of The Management School, University of Edinburgh, together with Vineet Agerwal, Angel Liao and Elly A. Nash authored a study entitled “The Impact of Effective Investor Relations on Market Value”. In their study they use nomination for IR Magazine’s “Best Overall Investor Relations” awards over a three-year period as an indicator of quality investor relations. Their study shows that firms that are seen as having effective investor relations, as indicated by being nominated for the awards, earn superior abnormal market returns both in the year of nomination and the year following the awards.
The part of the study that is of the most interest to me is the quantification the authors put on the abnormal risk adjusted stock returns earned by firms in the year following their nomination for an award. The results show that all nominated companies earned 80 basis points per month superior market returns. When you compound 80 basis points per month over a full year, the result is an excess return of 10%.
So while the awards may be a beauty contest, they appear to be one where there is genuine prize money at the end.
John recently retired as a Lecturer in Management at Rice University’s Jones Graduate School of Management, where he taught investor relations. Prior to that, John was in charge of investor relations for Sysco Corporation and Walgreen Co. He holds a MBA from the Kellogg Graduate School of Management at Northwestern University and a law degree from Loyola University of Chicago.
You can learn more about John’s thinking about investor relations at his blog, Investor Relations Musings.
Companies and IR executives get nominated for IR awards BECAUSE the shares have achieved superior returns. Some IR executives have part of their incentive compensation tied to a high ranking in IR league tables. The cautionary tale is Nokia: when the shares were stellar, Nokia IR execs would walk away with arm loads, literally, of awards. When the shares disappointed once, then twice, alas, not a nomination in sight. And Nokia IR was still performing at a world-class level.
Gene Stevenson
Global IR Leadership Network
Gene:
First, let’s not kid ourselves and say that IR awards are a perfect proxy for superb investor relations. After all, I practiced IR for over 20 years and never got a mention. However, the study by Professor Taffler is the most definitive that I’ve seen in this area. Most other academic research in the area centers around increased disclosure and an implied link to increased stock price. The Taffler study covers all investor relations activities. As to your point about getting nominated because of stellar returns, the study controls for that and addresses that specific point by measuring returns in the year following the nomination for the award. The evidence in the study suggests that superior stock returns in the year prior to the nomination help drive nomination for the awards, but that doesn’t explain the excess returns in the year after the nomination. The study covered a three year period and about 1,000 nominations per year, or over 3,000 in total, so I think it’s fairly broad based.
I’d love to get my academic friends to do more research in the area of investor relations, but so far I haven’t been able to convince them that it is a good field for research.
John