Q4 Blog

Every Thursday @ 1:00 p.m. ET I participate in #irchat on Twitter.  It is a weekly event hosted by Dan Dykens, CEO of Meet the Street, an online matching network for non-deal roadshows, which electronically schedules meetings between the buy-side and corporate executives.

The session only runs an hour so Dan asks one question every 15 minutes which gives us time for usually about three to four questions.  He does a fantastic job of stimulating the conversation by asking thought provoking questions which creates a lot of debate among the experienced IR professionals who participate each week.

In conjunction with findings released in December 2009 from Rivel Research Group on the premium the buy-side in the U.S. place on “superb” versus “poor” investor relations (IR), Dan started this particular #irchat session by asking “What do you think about Rivel Research’s buy-side survey which suggests that the valuation differential between good IR and bad IR is 35%?”

RIVEL’S FINDINGS

• Surveyed 250 members of the US buy-side on how they make investment decisions were initially asked “Does good IR impact a company’s valuation?”  Of the respondents, 74% stated that yes, good IR makes a difference. 
• The respondents were then asked how much as a percentage of a company’s valuation does superb IR contribute?  The median response was 10% for good with a 25% discount attributed to poor IR with Superb IR impacting a company’s valuation by a total of 35%.

This question stirred up quite a debate, especially since no one had access to the methodology or a definition of what constitutes “good” vs “bad” IR.  So the responses were based on the information we had.  What follows is an overview of how the chat unfolded around the question:

• The high number of people surveyed (250) gives this finding some credibility and can be considered statistically relevant: 
  - Although a few refuted the study as it was only based on what the buy-side constitutes as good vs. bad (again not sure how these parameters were defined) so the findings were viewed as more conversational/anecdotal as opposed to scientific.
  - However, one thought that it is okay to gather anecdotal comments about how IR is measured, but when speaking about ROI, specific inputs should be defined.
  - Another wanted to know what the breakout of the 35% impact on a company’s valuation among buy-side based on investment style i.e. value, growth, momentum, hedge fund and rapid traders.

• In spite of whether it was felt the study was credible or not, some had mixed feelings about the findings and how IR should use this information:
  - One stated that ascribing more of a discount to bad IR makes senses as it is similar to how word of mouth can impact a reputation (think of bad experience regarding service related issues i.e. Rogers, Bell) and in this case if a portfolio manager has a negative experience with IR (even if it is only once), that may taint their view of the company for good.
  - If research is correct/accurate, it is a powerful statement being conveyed and should be presented to uncooperative executive teams, as the larger 25% underlines the need for stronger communication with the buy-side.

The chat then turned to a conversation about “What constitutes good IR?”

• A company builds credibility by educating and communicating in good times and in bad. 
• Tailored targeting: contacts approached and the number of successful connections – with good IR targeting improves over time.
• Standard metrics such as liquidity, number of meetings, changes in shareholder positions and perception reports to name a few.
• Providing more detail and transparency around investment story as well as more access to senior management (not just CEO, CFO but other key players i.e. product, engineering etc.)

Coincidentally, another article in the Economic Times entitled “Companies with Good IR can command premium” was issued within a few days of the Rivel findings.  The survey covered 24 fund managers based in India and found:

• 29% of investors would pay a premium of anywhere between 10- 15%, and about 16% of institutional investors would pay a premium of 5-10% on share prices of those companies with a good IR program in place.
• Drilling down, the study found that institutional investors believed the most important quality of a firm’s IR is credibility of management and the IRO.

In spite of the differing sample sizes from both studies, the findings indicate that good IR practices are being recognized by investors.  While these studies are not considered scientific, in my opinion, anecdotal commentary is still useful information to have from an IR point of view.  If nothing else, it may make IR professionals stop and think about their interactions with shareholders and to either keep on doing what they are doing or make the necessary changes to enhance their relationship with the investment community.

Related posts:

1. Rivel Research: Transparency Key Factor in Buy-side Definition of Superb IR
2. Equity Research Analyst Weighs in on the Social Web – podcast
3. IR Best Practice: Get to know the Buy-Side
4. Institutional Investors and Analysts Increasingly Using Blogs and Social Networks for Research
5. Interview with Phil Pearlman, Director of Community at StockTwits (Audio)

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buy-side capital markets, investor relations