In this column we look at what research is out there covering the investor relations world
Rich people don’t trust you
Why so few rich people invest in the stock market is one of the more fascinating puzzles in the pages of financial academic literature. Explanations focus on such issues as optimism or risk and loss aversion. Now, researchers think they have found a key piece of the answer: the wealthy don’t trust the stock market.
‘Trust is a fundamental determinant of participation in the stock market, which is important to liquidity and the proper development of capital markets,’ explains Paola Sapienza, associate professor of finance at Northwestern University and co-author of ‘Trusting the stock market’, a forthcoming report in Journal of Finance.
The new model also explains differences in stock market participation across countries where overall levels of trust (as measured by countless sociologists) consistently correlate with participation rates, even when controlled for income and other factors. The economic implications may be huge: if Turkey had the same trust level as Ireland (the median country), the proportion of citizens owning stocks would rise to 8 percent – more than a six-fold increase.
Sapienza and her colleagues are looking into what investors take into account when assessing a stock market’s trustworthiness. ‘The issue is when people get out, how long it takes for them to get back in again,’ says Sapienza, who concludes that better education about the stock market can mitigate lack of trust.
Not Ghana go there
This just in: the level of corporate disclosure in Ghana is still low. A study published in Managerial Auditing Journal surveyed 22 companies on the Ghana Stock Exchange. The report’s authors hope their findings will help policy makers and corporations address questions of accountability and transparency.
Then again, maybe disclosure isn’t such a big deal in emerging markets when it comes to market value. Pakistani researchers investigated the connection between corporate governance and performance among companies listed on the Karachi Stock Exchange. While they found corporate governance does indeed matter, the particular elements of disclosure and transparency have little effect on performance. Board size (and consequently the potential for independence) as well as the alignment of management and investor interests via shareholdings have far more impact.
The rich get smarter
Do analysts convey information about intellectual capital in their recommendations? If your company is making a bundle and has fabulous growth potential, the answer is ‘yes’. Spanish researchers at the University of Murcia found these types of firms’ analyst reports featured more information about research, development and innovation, which usually gets short shrift compared with data on strategy, processes and customers.
Do you do any good?
Sorry to burst your bubble, but don’t think your fabulous IR program will shield your company’s stock from a market-wide meltdown. In fact, your mantle full of IR Magazine Awards may actually help drag you under. ‘Anecdotal evidence from practitioner literature strongly favors the view that IR has a positive impact on stock price,’ says Dr Sayjda Talib at Lancaster University. ‘And it might. But in times of declining market confidence, our empirical research shows just the opposite.’
Talib and co-researchers Professor Kenneth Peasnell and Dr Steven Young looked at 122 companies highly rated in the IR Magazine Awards from 1996 to 2002. When compared with a control group, the events related to Enron and its ilk had a significantly greater negative impact on firms with creditable IR programs.
Why this seemingly counter-intuitive finding? Talib has two theories. She says the awards are the best proxy she could find to measure IR quality. ‘But are we really capturing honest firms with good IR? Or merely corporate hype and window dressing?’ she ponders. ‘If Enron went down, any other company also recognized for its IR practices might likewise be clumped in the same dubious group and therefore penalized.’
Talib’s other theory is that IR actually does push up stock price. ‘It is possible that firms with good IR were trading at a premium before the accounting scandals,’ she concludes. ‘So when the shock happened, they took a bigger fall.’
How to catch a retail wave
Want to turbo-charge your retail media campaign? Then catch the wave – the fifth wave, to be precise. ‘You have to get your media message out at the time when retail investors are primed to hear it,’ explains Ernest Martin, associate professor at Virginia Commonwealth University. ‘Otherwise it doesn’t really help.’
According to Martin, wave theory interprets market actions in terms of psychological cycles composed of impulse waves and corrective waves. Embedded within each impulse wave are five smaller ones, three moving in the direction of the larger trend and two corrections.
Using technical analysis, Martin compared the performance of 50 US stocks against a control group to determine the effect of increased media coverage. He found that campaigns triggered at the beginning of wave five significantly strengthened their intensity. ‘Any of the upward waves are eligible,’ says Martin. ‘But the fifth wave is the one where many retail investors start investing. And its power is largely dependent on the strength of retail confidence.’
Ultimately, argues Martin, wave extension strategies can significantly boost a company’s capitalization while sprinkling the share register with a loyal core of longterm investors. ‘Retail media campaigns are often messy and unproductive,’ he points out. ‘This is a relatively easy – almost automated, in fact – method of making them far more effective.’
Dutch directors overworked, mired in ‘group-think’ Dutch corporate directors are well connected, with many holding directorships at different firms. Sometimes too many. According to researchers at Erasmus University in Rotterdam, the more interlocks of directors among firms, the greater the chance of a negative effect on future company performance. They blame the outcome on interlocking directors being both overworked and so cliquish that critical thinking becomes impaired.
‘These findings have strong managerial implications,’ says Marielle Non, one of the study’s authors. ‘Often the rationale behind hiring [an already busy board member] seems to be, This person has so many directorships, he or she can bring a lot of experience to our board. However, it appears some have so many time constraints that their experience doesn’t really count. Boards looking for new members might keep this in mind.’