IROs lead to lower stock volatility and more accurate analyst coverage, study finds
In-house IROs are better than IR agencies at helping investors and analysts get a clear picture of a company, according to new academic research.
The list of benefits of having an in-house IRO include lower stock price volatility, lower analyst forecast dispersion, higher analyst forecast accuracy and quicker price discovery. These benefits are reportedly amplified if an IRO has been with a company for more than three years.
The study – produced by Kimball Chapman, assistant professor of accounting at Washington University’s John M Olin Business School; Gregory Miller, professor of accounting at the University of Michigan’s Ross School of Business; and Hal White, associate professor of accounting at Penn State’s Smeal College of Business – set out to explore whether the presence of an IRO helps investors and analysts better understand a company’s financials.
The report authors note several reasons to be skeptical about the influence of IROs, including the fact that they can’t disclose non-public information, that non-IR staff can – and do – host earnings calls, and that analysts can often disseminate information to the market on a company’s behalf.
To test the influence of IROs, the researchers examined public companies between 2002 and 2012, grouping them based on a variety of factors, including firm size, market-to-book ratio, leverage and earnings volatility. Their findings are clear.
‘Even when investors and analysts receive corporate disclosures or other news about the firm, they often need help understanding the implications of the information for company value,’ the report authors say. ‘That is, they need help assimilating the information. For example, an investor might learn through a firm’s disclosure that a particular firm plans to increase its capital expenditures, adjust its product mix, invest more in R&D, or increase its presence in a new region in the coming years.
‘With each of these items, there will likely be some uncertainty as to the exact nature of the event or action and ultimately its implications for the firm. Thus, once investors and analysts receive information, they need help assimilating that information to understand it in a broader, more comprehensive context with respect to firm value.’
This study reveals similar findings to IR Magazine’s own research earlier this year, which finds that almost nine out of 10 members of the investment community will assign a premium to the share price of companies with a well-run IR program – and an even bigger discount to those with a substandard program.
The benefits of in-house IROs
When comparing companies without an IRO to those where the IRO had been there for more than a year, the researchers find the presence of an IRO leads to 2.5 percent lower stock price volatility, a 1.5 percent quicker price discovery process and analyst forecasts that are 14.4 percent more accurate, on average.
The report authors suggest IR plays a crucial role in controlling a company’s story and helping the Street to narrow in on important information, and that this is particularly needed as investors get their information from a broader range of sources.
‘Given that investors have limited resources and processing abilities, large volumes of information can ‘overload’ [them], which reduces their ability to fully process the information,’ the report authors write. ‘In addition to the deluge of corporate disclosure, there have been large increases in firm-related discussions from external parties in online forums, newsrooms and social media, as investors and pundits challenge management’s assertions and strategies.
‘These oft-times unvetted communications and opinions about firms can travel quickly across a broad set of market participants, which can have a significant impact on public perceptions, and thus valuation, of the firm.’
The longer the tenure, the bigger the impact
The researchers also examined the extent to which the tenure of an IRO has an impact. They find that when an IRO has been with a company for three years or more, the positive effects of having an in-house IRO are furthered.
Companies that have had the same IRO for more than three years show 3.6 percent lower stock volatility, their analyst coverage is 15 percent more accurate and analysts’ information is 15.5 percent less disperse than for companies without an IRO.
The report authors suggest this is because the longer an IRO stays with a company, the more he or she will come to be seen by the Street as an authority on the company. In addition, the personal relationships that are built up over time between IROs and the Street can lead to a clearer picture about a company’s stock.
The report authors conclude: ‘We provide evidence that (i) IR officers play an ongoing, long-term role in helping the market with assimilation, (ii) the tenure of the IR officer is significant in establishing more effective communication for enhanced assimilation, (iii) IR officers can help reduce uncertainty for market experts, such as institutional investors and analysts, which are known to have significant information resources already, and (iv) IR officers can help mitigate harmful contagion effects of bad news.’