Disclosures improve and coverage increases with ex-analyst IROs, study says
Companies that hire heads of IR with Wall Street experience are more likely to experience improved financial disclosures, an increase in analyst following and greater benefits from investor days, according to new academic research.
Experience as an analyst is a ‘competitive advantage in communicating with investors,’ say three academics who explored the performance of non-financial S&P 500 companies that appointed a new head of IR between 2004 and 2016.
When Mifid II comes into effect in early 2018 it is expected to cause some sell-side contraction, which will likely lead to an increase in former analysts seeking corporate IR roles. The number of investment bank research analysts has fallen by 10 percent since 2012, according to data released earlier this year by Coalition.
BENEFITS OF FORMER ANALYSTS
After they hire former analysts as heads of IR, companies’ 8Ks become shorter, include fewer complex words and contain a smaller percentage of uncertain financial terms, according to the researchers, who used the SEC’s Plain English Disclosure Rules 421 (b) and 421 (d) as a benchmark.
‘What we think is at play here is not just pure communications skills or presentation skills, but really being able to put complex finance and accounting information into the same words and vocabulary the capital markets understand,’ co-author Rucsandra Moldovan, assistant professor in the department of accountancy at John Molson School of Business, Concordia University, tells IR Magazine.
The benefits of Wall Street experience extend beyond improved disclosures, according to the research. Companies that hire ex-analysts are more likely to experience improvements in institutional investor holdings, analyst coverage and stock liquidity. Moldovan says this is because former analysts can ‘more confidently speak to investors in their own language.’
Companies that hire former analysts are also more likely to participate in investor days rather than broker-led roadshows, according to the research.
‘An analyst has expertise in processing corporate disclosure and understands good-versus-bad disclosure practices from the perspective of investors,’ the report authors write. ‘If a firm capitalizes on such expertise and deep understanding… the investment community would likely incur lower costs to process corporate disclosure. Thus, we expect firms to attract more interest from analysts and institutional investors after hiring a former financial analyst as IRO.’
The report authors suggest ex-analysts could be particularly valuable at companies where the story is harder to explain. This includes internet-based companies, where the business model may not follow a traditional Wall Street pattern. The report highlights Spotify’s appointment of Wall Street veteran Paul Vogel as head of IR as an example of this.
Peter McDermott, principal, corporate affairs practice, Korn Ferry, says that there has been an increase in interest from CFOs looking to hire ex-analysts to their IR team, but he cautions that the transition is not simple.
‘Seasoned investor relations leaders have years, if not decades, of corporate IR experience,’ he says. ‘This should not be discounted. The key is culture fit. If a senior analyst is used to managing and delegating, they will need to remain adaptable to a function which relies heavily on matrixed internal resources, gained through relationship-building and influence. The successful IRO builds bridges before crossing them, which takes a particularly collaborative management style.’