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Jun 09, 2022

IR papers: Trust, competence and emotion in the corporate disclosure genre

Voice coaching may actually erode credibility, and more from the latest academic research

Researchers and regular folk alike note the association between suppressing one’s feelings and poor psychological and physical health, as well as unfavorable social consequences. And a new study suggests that corporate managers who strive to control emotional expression in company disclosures may also experience a negative reaction from investors.

The acoustic signal

Four ways managers attempt to control their emotional expression – and that analysis shows investors easily detect.

  • Lower pitch
  • Lower volume
  • Less volume variation
  • Faster talk.

‘Lots of IROs spend time working with corporate leadership to get them to speak in a way that isn’t too emotional,’ notes study co-author Blake Steenhoven, assistant professor of accounting at Queen’s University. Steenhoven adds that these sorts of efforts likely stem from a wish not to give away any information beyond the actual content in an interaction. ‘But our evidence shows this sort of preparation can have unintended consequences – and might even backfire,’ he warns.

In a series of controlled lab experiments, Steenhoven and his team demonstrated that while attempts to limit vocal emotional expression usually work, they also end up making managers sound less natural and authentic. ‘That actually lowers perceptions of their competence and trustworthiness,’ he says. ‘Ultimately, that affects credibility. And it’s hard to imagine anyone wanting to invest in a firm helmed by someone who isn’t credible.’

If this kind of coaching reduces trust – Steenhoven can’t say by how much, only that the effect exists – what’s a manager to do? Steenhoven believes there’s a middle way.

‘You want to make sure you aren’t undermining certain aspects of effective disclosure in order to meet one specific aim,’ he warns. ‘Fixating on limiting emotion in speech can be a reasonable goal – but IROs shouldn’t lose sight of the big picture.’

The kind of IR you want in a crisis

It’s no news that good IR pays off in times of market uncertainty. Now comes a new study showing exactly how much that payoff is worth and, importantly, exactly what kind of IR does the heavy lifting.

Meshing investor relations rankings developed by Institutional Investor together with stock and accounting data for a large sample of European firms, German investigators report that those with strong IR experienced at least 4.72 percent higher cumulative returns as markets collapsed in February and March 2020. Firms with high-quality IR continued to do better well into fall 2020. Further tests show firms with better IR benefited much more in countries with questionable legal environments and where people are less tolerant of uncertainty.

No link was found in industries particularly affected by the pandemic, nor was evidence uncovered that companies with better IR had better operating performance.

‘We found that the top IR companies are also associated with higher investor loyalty and appear to have attracted more institutional investors over the crisis period,’ says study co-author Daniel Neukirchen, post-doctoral research fellow at TU Dortmund University. ‘This suggests IR generates value by adding to credibility and by diversifying the shareholder base.’

The researchers then sought to identify just which investor relations functions contributed to all that credibility, loyalty, diversity and outperformance. Their findings, perhaps not altogether unforeseen by diligent IR Magazine readers, nevertheless surprised investigators.

‘We discovered only one communication channel was driving virtually all our results: private IR functions [such as organizing one-on-one video conferences] with senior management,’ says Neukirchen.

World o’ research

  • Analysts who intentionally ‘linguistically mirror’ executives during conference call Q&As extract better responses. Linguistic mirroring happens when conversational partners mimic each other’s terminology, intonation or speech patterns. The upshot, say US scientists, is an increase in trust and rapport. In a conference call setting, that translates into longer and more analytical answers.
  • Managers of companies based near sites of terrorist attacks are more likely to issue optimistic long-term annual earnings forecasts. Researchers speculate this is an attempt to counterbalance the short-term pessimistic response to the violence.
  • Female chief executives tend to issue more earnings forecasts than male CEOs – and those forecasts are better.

This article originally appeared in the Summer 2022 issue of IR Magazine.