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Sep 22, 2015

IR Papers: IR works – here’s how

No matter how you look at it, the return on investment in IR is enormous

A roundup of academic research from the world of IR studies

Need to do more with less? The results of a comprehensive study pinpoint just which IR activities and strategies add value – and which do not. The survey of more than 800 IROs from 59 countries uncovers strong causal links between certain IR activities and Tobin’s q valuation ratios. 

‘[Based on a one standard deviation higher index score on total IR activity] we document somewhere in the order of an 11 percent to 15 percent boost in fundamental valuations,’ says study co-author Andrew Karolyi, professor of finance and economics at Cornell University. ‘No matter how you look at it, the return on investment in IR is enormous.’ 

Karolyi and colleague Rose Liao at Rutgers University discovered the valuation boost per unit of investment in IR is disproportionately higher for smaller companies and those domiciled in countries with relatively weak disclosure and investor protection standards. 

But the researchers find not all IR efforts have an economic impact. Karolyi says the most reliable statistical evidence arises for broker engagement via activities such as sponsored conferences, CEO/CFO meetings with investors, and the extent of global IR efforts. On the other hand, actions related to guidance, the existence of disclosure communications, social media policies or ESG goals are not reliably associated with higher valuation ratios.

‘The biggest bang for the buck comes from these direct engagements, particularly on the global side,’ says Karolyi. As for other ‘channels of influence’ such as providing ESG-related information to investors or having rigorous disclosure policies, he adds: ‘They just don’t translate into a big punch in terms of valuation.’ 

For many IROs, the study’s results suggest a reallocation of efforts. ‘They should think about putting extra effort into that next broker conference, getting management in front of investors in direct one-on-one meetings and global strategy,’ advises Karolyi. ‘They should worry less about ESG-related matters and whether their disclosure policies are the right size – at least for the foreseeable future.’

The study also offers a counterweight to previous research suggesting a potential ‘dark side’ to IR, such as ‘spin’ that artificially promotes valuations beyond fundamentals. ‘[Some] have proposed that IR is designed for nothing more than to stoke liquidity and facilitate, for example, the exit of controlling interests,’ says Karolyi. ‘But when we tested to see whether a bigger IR effort translated into relatively higher liquidity, we found nothing. Zip.’

This article appeared in the fall 2015 print issue of IR Magazine