IR papers: Relationship reporting

Jul 11, 2013
<p>A roundup of academic research from the world of IR studies</p>

Companies with long-term investment plans often go to great lengths to attract long-term investors. But research suggests that once prospective investors become current ones they tend to respond more to a company’s short-term prospects. This, in turn, can lead to myopic, short-term performance management in an effort to retain them.

If only there was a cost-efficient communication strategy that would encourage current investors to maintain or increase their investment in response to long-term behavior. Researchers at the University of Illinois say there is.

Dubbed ‘relationship reporting’, the technique aims to enhance both a company’s likability and its management credibility by emphasizing the investor/management relationship through more frequent, more personalized and more interactive communication, which need not contain economically relevant information and can usually be accomplished at minimal cost. Here’s an example excerpted from the University of Illinois study:

Dear [shareholder name],
[We are] happy to welcome you as a company owner and important stakeholder in our firm. We hope you will be proud of your ownership of [our firm]. We appreciate your support!
[CEO’s name]

In an experimental setting, researchers found that when exposed to this and similar communications, subjects increase their holdings when R&D spending demonstrates a long-term focus.

‘It didn’t take much to make a difference,’ says study co-author Kevin Jackson, associate professor of accountancy at the University of Illinois at Urbana. ‘The messages involved need to be personalized but not particularly detailed or informative. But you have to be operationally committed to taking a long-term approach. Otherwise, you could be wasting your money or doing something detrimental to management credibility.’

Making the play

German investors have generally been regarded as risk-averse and highly rational. But a new survey of more than 1,000 individuals suggests a significant proportion make financial investment decisions involving equities simply for the thrill of the game.

When queried about the appeal of securities, the economic motive, as expected, predominates. But it is by no means the only motive: excitement, activation and thrills are consciously sought by about a fifth of investors. And this motive is particularly pronounced among men: 78 percent of male respondents invest their money in stocks for the stimulation and excitement, while only 22 percent of women do so.

‘There was far more gaming behavior than expected,’ says study co-author LW Murray, emeritus professor of finance at the University of San Francisco. ‘The study suggests a significant part of the German investor base is not as risk-averse as was once imagined.’

World o’ research

  • A Swedish test of the optimal disclosure hypothesis suggests managers should redirect resources devoted to the annual report toward quarterly reports and web pages, especially if the company has an analyst following.
  • A University of Hawaii study of Google search activity finds individual investors become most interested in companies that post positive earnings surprises in relation to analyst consensus. 
  • Universities do a poor job preparing students for a career in investor relations, according to a University of Georgia survey. Qualitative interviews with 13 NIRI members indicate little integrative opportunities for critical skills in finance and communications – that’s despite the growing number of courses being offered for IROs (see Masters of the IR universe). 
  • A University of London survey of IR and PR officers’ professional practices finds communication with financial audiences has less scope for excitement, persuasion, self-expression, brevity or simplicity, and a greater need for accuracy and caution. 
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