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Dec 20, 2021

IR papers: Investors and analysts can glean information from tone of voice and what’s left unsaid

It’s not what you said, it’s the way that you said it

While IROs claim to be exceptionally careful about what they disclose in private meetings, mounting evidence suggests some investors continue to profit from informational ‘leakage’. Now we know why. The results of a new study suggest this very conscientiousness may, ironically, work to promote selective disclosure to preferred audiences.

‘Both the SEC and NIRI encourage greater pre-meeting preparation and consideration of materiality as effective ways to improve Reg FD compliance,’ says study co-author Scott Asay, associate professor of accounting at the University of Iowa. ‘But we find preparation has the opposite effect.’

To examine how the extent of preparation might affect disclosure decisions, the researchers asked 133 experienced IROs to consider information falling into a materiality gray area. Their experimental results reveal that IROs use distinct decision processes to resolve the inherent conflict between regulation and relationship-management pressures.

When confronted with an on-the-spot decision about whether to disclose potentially material information, the vast majority of study participants were unlikely to provide any information at all – regardless of who they were speaking with. But the ‘materiality threshold’ for preferred investors dropped substantially among IROs who had conducted a thorough materiality assessment.

‘Pre-disclosure preparation gives IROs the room to rationalize their decision to disclose,’ says Asay. ‘If they decide beforehand that information is gray in terms of its materiality, then this ambiguity makes it easier to disclose it to favored investors.’

If more deliberation about information materiality won’t boost compliance, what will? Study co-author Michael Durney believes the SEC should expand Reg FD to include a principle of consistent disclosure across private meetings.

‘The current mosaic system works directly against [consistent disclosure],’ says Durney, an assistant professor of accounting at the University of Iowa. ‘We aren’t saying IROs are the bad guys here, or that they shouldn’t prepare for meetings. But they should be careful about their preparation and consider the idea of consistent disclosure – otherwise they may not get the effect they are looking for.’

Acoustic pitch

Almost 20 years ago, the SEC fined drug-maker Schering-Plough $1 mn for a Reg FD violation, warning that ‘providing guidance to a select few through a combination of spoken language, tone, emphasis and demeanor’ was exactly the sort of hanky-panky the commission was out to stop. Few FD charges have been brought since, but the issue of ‘vocal cue risk’ has re-emerged, along with market evolution and regulatory change.

Now a study using speech analysis software reveals corporate communicators are well aware of this risk and attempt to tailor non-verbal communications according to their reporting goals.

‘Managers speak faster and use higher and more variable pitch and volume when persuading prospective investors to invest in the company,’ says study author Blake Steenhoven, assistant professor of accounting at Queen’s University. ‘But they lower their pitch and pitch variation when trying to keep current investors in their stock.’,

Female (but not male) managers use lower volume for inaction-focused persuasion.

‘It’s somewhat intuitive,’ concludes Steenhoven. ‘But communicating in a style that’s consistent with either an action or inaction state essentially primes your audience to give the reaction you're looking for.’

World o’ research

A study of large listed German companies finds those with the tightest strategic integration across the IR and PR functions also enjoy the nicest work environments.

University of Iowa research shows that US listed companies hold about 200 private investor meetings per year, on average. Most are in the form of phone calls (57 percent), followed by private meetings at conferences (26 percent), office meetings (10 percent), roadshows (7 percent) and informal meetings (2 percent).

Corporate leaders often communicate their strategies in terms of battles, offensives and victories. But a study published in the latest Academy of Management Proceedings shows investor reaction to military language is generally negative – except when used by weak-performing firms.

This is an article from the Winter 2021 issue of IR Magazine. Click here to access the digital magazine.