IR Papers: Bring on the tough questions

Apr 10, 2012
<p>A roundup of academic research from the world of IR studies</p>

If you believe investor recognition affects company value and cost of capital – and what IRO doesn’t? – you’d probably appreciate an early indicator of a company’s market visibility.

Researchers now say they’ve developed a measure, based on analyst earnings call participation, that offers investors (and companies) a ‘one-step ahead’ advantage when evaluating stock market dynamics.   

Sampling conference call transcripts from 2002 to 2009, investigators find that changes in the number of analysts asking questions predict future changes in analyst coverage, institutional ownership, company growth and stock returns, especially for smaller firms.

‘Prior studies have measured visibility by looking at analyst or investor following,’ says Franco Wong, associate professor of accounting at the University of Toronto.

‘But those measures are actually consequences of being visible. A better measure is looking into the process of how a firm creates interest.’

Wong says being forthright and even-handed when dealing with questions is an effective way to create that interest. ‘Some companies may choose to avoid taking questions from analysts they feel have a pessimistic view of the company,’ says Wong.

‘But if calling into a conference call is a waste of busy analysts’ time, they are unlikely to call again. And if they don’t call again, as we saw in our research, some may actually stop coverage.’

And that, notes Wong, can have significant stock price implications. ‘The more people are allowed to ask questions, the better it is for the company,’ he concludes.

World o’ research

- Disclosure of non-earnings guidance – especially about long-term value creation – was commonplace even before the debate on earnings guidance gained momentum, according to a study forthcoming in Financial Management. Researchers say their findings belie business and accounting trade associations’ concerns that guidance activities have contributed to earnings fixation and short-termism in capital markets.

- Shareholders don’t care for your CEO’s equity compensation plan? Tell your boss not to sweat it: the yacht is safe. Researchers for Stanford’s Rock Center for Corporate Governance find little statistical evidence that either lower shareholder voting support for – or outright rejection of – proposed equity compensation plans leads to any decrease in the level or composition of future chief executive incentive compensation.

- Is your company destroying the planet with greenhouse gases? Don’t hide the fact: tell the world! Researchers at the University of Hawaii System and National Taiwan University find the market actually reacts favorably to negative media exposure of corporate response to climate change.

- An analysis featured in Issues in Social and Environmental Accounting of FT 500 companies’ non-financial reports from 1989 to 2007 shows the words ‘sustainability’ and ‘responsibility’ are still growing in popularity when included in titles, while the word ‘environment’ peaked in 2002 and has since reduced in frequency.

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