The view from academe

Jan 17, 2008
<p>According to the academics, the pricing of financial assets is about more than just money</p>

The affect effect
Just as you always suspected, it really is about more than mere money. While traditional finance theory determines returns based on risk measurement alone, evidence is accumulating that affect plays a significant role in the pricing of financial assets.

Now comes a new study that finds the stock of the least admired companies outperforms, on average, the stock of companies most admired. The study’s authors, who surveyed Fortune magazine’s annual list of America’s most admired companies over the last 23 years, surmise the different returns are due to affect – the quick, often unconscious emotional response to a stimuli, in this case a stock.

Study co-author Meir Statman, professor of finance at Santa Clara University, explains there are both immediate and delayed effects of corporate reputation-enhancing efforts. ‘Say you have revitalized the IR function and in the process boosted the company’s reputation,’ he suggests. ‘That in turn leads to an increase in the stock price and returns for current shareholders. Unfortunately, that higher price also sets the stage for relatively lower returns for new shareholders.’

But you need not shed a guilty tear that perhaps this new crowd was lured by hype. According to Statman, its members know exactly what they are doing and are still getting a ‘fair deal’. He likens buying a stock to buying any other product. ‘Prius or Rolex buyers do so because, even though those products may cost more, this is a way to tell themselves and others what kind of people they are,’ he comments. ‘Investors in companies that are admired get a sense of peace of mind or lower subjective risk that is beyond the objective risk measured by beta.’

Eye on symmetry
Almost all IR websites feature email contact facilities. Too bad so many are counterproductive.

‘If you provide the opportunity to email questions to the IR department and then don’t follow up with timely and relevant answers, you will do little more than disappoint investors,’ says Harold Hassink, professor of auditing at Maastricht University. ‘In that case, you are better off not providing email communication at all.’

Hassink and two colleagues sent ‘mystery investor’ emails to 253 of the largest companies in six countries: 30 percent of those companies ignored both the original email and a subsequent reminder. Half of those who responded replied within 24 hours. On average, 65 percent of the detailed questions in the email were answered adequately, with companies in Australia, the Netherlands and South Africa providing significantly more relevant answers than firms in the UK, Belgium and France.

Hassink hopes the study’s results will cause IR managers to critically evaluate their own email-handling performance. ‘Companies may want to investigate control structures, internal routing and specific training programs for IR staff,’ says Hassink, who argues in favor of more symmetrical interaction between companies and their investors.

Mighty mouth
US researchers studying the relation between households’ stock purchases and those of their neighbors attribute approximately one quarter to one half of the correlation to word-of-mouth communication.

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