The IR papers: an academic look at the capital markets
Spin equals sizzle
Hiring an IR company to generate positive media coverage works. According to a study by David Solomon, assistant professor of finance at the University of Southern California, an IR agency’s ability to spin the news by securing disproportionately greater media coverage of a company’s positively toned press releases does affect stock price.
On the down side, it’s only a short-term upper at the cost of longer term disappointment. ‘It is much harder to push positive news around earnings time,’ explains Solomon. ‘The cost of spin is that investors are disappointed around hard earnings news.’
He conjectures that non-earnings announcements like product launches tend to be ‘softer’, ‘creating more scope for IR firms to push a particular interpretation of ambiguous news events.’
But if spin is just sizzle, why even hire an IR firm? Simply for the sizzle, perhaps. Solomon’s study, which used a database linking IR firms to their clients from 2002 to 2006, notes several interesting characteristics of companies that hire IR firms:
- A higher proportion of CEO pay in stock and option compensation predicts a higher probability of using an IR firm
- IR company clients are about 3 percent more likely to restate their earnings in a given year
- IR firm clients are more likely to selectively time news releases.
‘To the extent that using an IR firm is a form of manipulating investors, it may also be associated with other types of investor manipulation such as earnings management and selective disclosure,’ states Solomon. ‘IR firms perform several valuable services but spin seems among the easiest to sell. Perhaps they should focus on other ways to add value.’