IR Papers: Honesty pays

A roundup of academic research from the world of IR studies

Does being honest and transparent matter in the long run? To date, the depressing answer from academe has been ‘no’. But new research from Florida State University suggests investors give credit to managers who have a history of being forthcoming.

In two experiments that tested corporate credibility in an earnings guidance setting, Eric Gooden, now assistant professor at Virginia Commonwealth University, found being forthcoming had a positive impact on long-term investor assessments of management reporting credibility. The effect is especially great for prospective investors and magnified when earnings news is negative.

‘For prospective investors, forthcoming disclosure, especially about negative news, is incredibly important,’ says Gooden. ‘Managers with a consistently forthcoming track record of disclosure can expect investors to be more likely to follow their guidance.’

From the top

Who should communicate ESG information to institutional investors? Not a company’s IR officer, according to six European fund managers. Instead, the investors surveyed place much greater emphasis on top management – and even the board of directors – as gatekeepers of ESG information.

The reason, as reported in a master’s thesis from Finland’s Aalto University, is investor perception of management as a mirror of ESG’s importance throughout the company. ‘For companies to claim ESG issues are of strategic importance to the company, the CEO would have to feel comfortable discussing the issues,’ writes thesis author Sade Rytkonen.

‘[A lack of understanding or awareness of] the company’s current ESG practices threatens to compromise the credibility of ESG communications.’

All the right moves

A study of ADR listings switching from the American Stock Exchange or NASDAQ to the NYSE shows that while return performance declines, trading volume increases.

The findings, published in the Journal of Applied Business Research, reflect the experience of domestic companies. The report’s authors say their empirical analysis is consistent with management timing their move when stock performance is peaking.

They also find ‘bumping up’ to a more prestigious exchange is a great way to boost ADR interest: in the 500 days after the listing changes, the average daily trading volume for 32 sample firms jumped from $2.7 mn to $3.6 mn.

World o’ news

-Plenty of research shows managements tend to take credit for good news and point to bad economic conditions when results disappoint. But do investors actually notice this self-serving disclosure strategy? Surveying the investor reaction to the earnings press releases of 45 Dutch public companies, a Tilburg University study finds investors don’t buy it when the boss says he’s responsible for good news. Investors will give credibility to management claims that external conditions caused bad news, however.

-In the UK, a company’s size and type determines whether it discloses risk information in the narrative section of its interim report. That’s as opposed to actual risk being the major determinant, notes a report from Stirling University in Scotland.

-In the case of unfavorable earnings surprises, management can mitigate pessimistic trading by short-sellers by adopting a positive tone during the earnings conference call, US researchers report. Restraint is called for, however, when there’s a highly positive earnings surprise – results suggest short-sellers could view it as ‘inflated talk’ leading to an overreaction by more ‘naive’ investors.
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