Why You Should Be Investing More in Investor Relations

By | August 2, 2011

I’ve always been amazed that brand managers and others have thousands and even millions of dollars at their disposal to properly position a product or service, like a cup of coffee or an insurance plan. But when it comes to the “product” of the company itself, its management and its financial valuation, the devoted resources can be less than plentiful.

But now there’s concrete evidence showing that spending money to promote the firm among Wall Street buy-side analysts and institutional investors makes a lot of sense. That’s something that our clients at the Financial Relations Board already know well, and it’s nice to see it backed up in academia.

A study by professors at Wharton and the University of Michigan provides strong evidence backed up by data showing that adopting IR strategies and hiring an external firm does in fact make a difference for companies that are not “highly visible” due to size, location or other factors. They studied 210 firms.

In their paper, authors Brian Bushee and Gregory Miller write that:

 

Our empirical tests examine a sample of small and mid-cap companies that initiated an IR

strategy by hiring of an IR firm. We find that IR activities are associated with significant

increases in the number of institutional investors and the percentage of institutional ownership over the year following the initiation of IR efforts.

 

And that has a significant effect. By increasing the participants willing to put up capital to help the firm operate, the company’s valuation can rise and its cost of capital – the money paid to borrow money or issue stock – can fall. Communicating product attributes is something that brand managers know how to do well. Finance officers and senior management can take a cue from their marketing counterparts, getting help to craft and tell a compelling corporate story to investors willing to listen.

Be Sociable, Share!