Introduction
For many years, investor relations and associated elements have remained to be some of the least researched on topics when it comes to corporate communications (Bassen, Basse &Ramaj 2010, p. 69). In the past, many companies, such as Williams, Tyco, and Global Crossings, have been faced with scandals, most of which relate to financial accounting practices. As a result, there has been a call for a re-evaluation of corporate investor relations and disclosure standards (Bragg 2010, p. 56). A number of shortcomings have been identified in relation to investor relations. The limitations are some of the factors behind the reported scandals. In addition, they have led to the collapse of the firms that are involved. One such company is Enron, an American giant in the energy sector. To this date, it remains to be one of the largest bankruptcies in American corporate history.
The collapse of Enron and other major entities prompted shareholders to scrutinize the companies that they were investing in more closely. As a result, investor relations became the top agenda of most companies. The reason for this was to restore the confidence of these stakeholders in contemporary business organizations. Trust could no longer be assumed (Davidson, 2010, p. 44). Instead, the corporate world had to win back the trust of its investors. Soon, companies realized that the activity could result in a competitive advantage. Today, the importance of investor relations has become an over-emphasized issue (Bragg, 2010, p. 89). Practitioners in this field are charged with the responsibility of regaining the trust of the American public. In addition, they are also attempting to raise the valuation of their firm’s stock in the market.
In this paper, the author will provide critical analysis of the performance of investor relations practitioners in the contemporary global market. To this end, the author will assess the role of these professionals and the interaction between their duties, share price, and value of a firm. The contributions made by these practitioners to the value of a stock will also be analyzed. Finally, the various factors that should be taken into consideration when judging the performance of these professionals will be evaluated.
The Role of Investor Relations Practitioners
The investor relations practitioners’ primary job is to build a communication relationship with investors. They are able to achieve this through analysts, financial media, and regulators. In recent times, credibility has become a key issue for investors in the American corporate world (Brennan & Tamarowski, 2000, p. 30).
The persons who deliver the message must be credible for it to be considered as the truth. The American public has already lost trust in the management of corporations to furnish them with the correct financial information concerning their firms. As such, investor relations practitioners have been instrumental in aiding companies in communicating with the public. The track record of an investor relations practitioner, however, comes into play. Investors assess how truthful one has been in the past to determine whether or not they can be trusted at present. Although the growth in sales and profitability plays an important role in raising a firm’s share price, investors are more interested in the future performance of a company (Dougal et al. 2011, p. 659). Such information can only be communicated by credible investor relations practitioners.
Investor relations practitioners’ role in a firm also involves ensuring that the share price of the company reflects its actual value. It is important to note that the stock price of a company also depends entirely on its performance, as well as its business model rather than just investor relations (Dougal et al. 2011, p. 670).
However, it is important to note that investor relations provide an avenue for shareholders to learn more about the business model that has been adopted by a company. Investors are also made aware of their company’s financial position. An investor relations practitioner also communicates a firm’s financial forecast, and the management team charged with the responsibility of running it. As such, investors have a better understanding of their company. They are also able to assess its worth. As a result, the share price of a firm receives fair valuation in the market (Fang & Peress 2000, p. 2041). Investors can also easily predict the future of the company, making it easier for them to make decisions whether or not to buy the firm’s shares. In the process, the stock price of a firm is raised.
An investor relations practitioner of a firm also helps in promoting the liquidity of its shares (Fang & Peress 2000, p. 2042). Liquidity is the term used to describe the degree to which particular security or asset can be either sold or bought without affecting its price. In this case, liquidity can be used to describe the ability of shareholders to buy or sell shares characterized by high trading levels. Investors prefer liquid shares. As such, they can be in a position to trade their shares at their true value anytime need arises. An investor relations practitioner is in a position to promote the liquidity of a firm’s share by communicating the company’s financial position with the public (Fang & Peress 2000, p. 2044).
In the process, he or she is able to attract potential investors to invest in the company by purchasing its shares. Since many investors are willing to purchase the company’s share, current shareholders are able to easily sell at the prevailing market value.
One can also say that investor relations practitioners act as a bridge between a firm’s management and the shareholders. Here, a company relies on the practitioner’s communication skills (Griffin, Hirschey & Kelly 2011, p. 3954). An investor relations practitioner must be in a position to communicate the financial position of the firm clearly to the shareholders (Phillimore 2012, p. 319).
As such, they will be able to rely on the management to raise the stock prices in the near future. The management also wants to see what value the practitioner has added to the firm. The value can be quantified in terms of an increase in share price or not. Investors are also interested in value in communication. In this case, the investor relations practitioners should be in a position to address all the issues regarding a firm that are raised. As a result, investors will not be required to raise such issues with the chief financial officer (CFO) or the chief executive officer (CEO). Besides acting as the bridge between shareholders and the management, the practitioner can also coordinate efforts with other departments of the firm, such as the marketing and the public relations division. They can also be instrumental in organizing visits by investors to the firm’s production facilities.
Firms need investor relations practitioners to attract new investors and maintain existing ones. The investor relations practitioners are mainly concerned with establishing a broader institutional shareholder base as opposed to day to day trading activities (Griffin et al. 2011, p. 3949).
Investor relations practitioners mainly focus on institutional investors, such as pension funds, insurance companies. Similarly, Hedge funds and venture capital are other types of investors. A successful investor relations practitioner will attempt to make shareholders believe in the future of the firm. As such, they will tend to hold on to their stock. Besides maintaining the existing shareholders, the practitioner will also seek to attract new investment (Hoffmann, Pennings & Wies 2011, p. 900). It is important to note that most investors are not willing to enter into a market they perceive to be inefficient. Inefficiency in most cases, is associated with low levels of daily trading volumes. To achieve this, a good investor relations practitioner will seek to push up the demand of the stock. Such efforts will result in positive changes in the stock prices, which stimulates more trading.
The Interaction between Investor Relations Practitioners, Firm’s Share Price, and the Value of the Organisation
Modern-day investor relations practitioners have come to the realization that investors are no longer interested in the firm’s sales or profitability, but its value and business model. As such, companies have to expand on the scope of their communication (Becker, Einwiller & Medjedovic 2014, p. 155).
Traditionally, investor relations practitioners were only interested in the disclosure of financial information. However, it is also paramount that they furnish investors with nonfinancial information. Such information can touch on the top management and environmental conservation concerns (Becker et al. 2014, p. 155). Apple’s recent drop in stock price was brought about by concerns that the company’s CEO was growing too thin. As a result, investors lost trust in his leadership skills and were afraid that the company’s value was bound to go down. However, communication of financial information still dominates over two-thirds of the investor relations practitioner’s role. They not only communicate the past successes associated with the firm but also the strategies that have been put in place to ensure an increase in the future earnings of a firm.
In the process of disclosing both the vital financial and non-financial information concerning a firm, investor relations practitioners empower investors to make a well-informed decision. The nature of the information provided influences the investors’ decision to buy or sell a firm’s stock (DeSanto & Bradin 2011, p. 255).
It is important to note that for every one share sold, there must be a willing buyer in order to ensure that a company’s stock price remains stable. Poor communication and case of missing or inconsistent information on firms earning will result in high liquidity of shares. At the same time, the stock price will go down since the shareholders will trade on negative information (Hong, Kubik & Stein 2005, p. 2820). Few new investors will also be willing to buy the stock for fear of making losses. The resulting situation will be that the rate at which shares are being sold will be higher than the rate at which they are being bought (Tetlock 2010a, p. 1510). In the process, the share price will continue to go down. The value of the firm will also decline to result from the fall in stock prices.
It is, therefore, important that investor relation practitioners disclose the right information to the investors to avoid driving down stock prices. However, they should be keen to avoid undervaluing or overvaluing the firm (Petersen & Vredenburg 2009, p. 12). Undervalued companies are those with a stock price that is lower than their asset value or their earning capability (Whitwell, Lukas & Hill 2007, p. 85). Such firms are subject to hostile takeovers, a situation where one company acquires another without the consent of the existing board of directors. The company acquiring the other manages to do this by buying the stock of the target company directly from the shareholders, often offering them a higher price.
Overvaluing of stock, on the other hand, is a situation where the price is higher than the value of the assets owned by a firm or its earning potential. Most investors are not willing to overpay for a stock. As a result, the trading volumes of an overvalued share will drop significantly. Investor relations practitioners should, therefore, aim at providing the fair valuation of the company to avoid negatively impacting the firm (Petersen & Vredenburg 2009, p. 13).
Investor Relations Practitioners’ Contribution to a Firm’s Stock Value
An investor relations practitioner directly impacts a firm’s stock value. He or she achieves this through facilitating the communication of a firm’s present and expected future position to the investors. Traditionally, corporate America used to depend on external investor relations agencies to communicate their financial position to investors (Davis 2006, p. 613). Little attention was paid to the view of the investors.
However, the situation has changed today, with many companies across the country establishing an internal investor relations department. Those that have taken the step have been viewed to have better results in terms of enhancing better relations with shareholders. The internal investor relations department also ensures that the issues raised by the shareholders are passed on to the management for them to be addressed (Joe, Louis & Robinson 2009, p. 599). Through feedback, shareholders feel that they are valued by the firm. As a result, their confidence in the company grows. Such shareholders are less likely to sell their stock.
Through proper investor relations programs, the management is kept in check. If properly applied, investor relations can promote accountability in top management. The management will also communicate key issues to the shareholders before taking action (Ragas, Laskin & Brusch 2014, p. 188).
For example, a company wishing to engage in major investment activity, such as acquiring another company, will need to inform their shareholders. Such investments are always viewed as risks that may result in losses by shareholders. Failure to disclose such information can result in many shareholders seeking to sell their stock before such events. An investor relations practitioner will play a crucia1l role in communicating such information to shareholders in order to avoid trading on negative information. Trading on negative information will always result in the lowering of the stock price (Ragas et al. 2014, p. 188). By ensuring that the shareholder’s confidence in a firm is always maintained, an investor relations practitioner will have positively impacted on its stock price.
Only by carrying out his or her roles diligently can an investor relations practitioner positively impact on the stock value. Investor relations practitioners should be truthful while passing information to shareholders (Peasnell, Talib & Young 2011, p. 82).
A dishonest practitioner will always be judged by his track record and will, for this reason, not be of any value to the company. When it comes to valuing a firm, investor relations practitioners should work closely with other departments to ensure that what is communicated to shareholders is supported by other specialists within the organization (Laskin 2009, p. 230). As much as the investor relations practitioner wants to be truthful, he or she should handle information that is sensitive to the utmost care. Such information should also be prevented from leaking to the public without first confirming the details. The reason behind this is that it would result in confusion among shareholders (Tetlock 2010b, p. 3533). The improper handling of Steve Jobs’ health condition by Apple’s investor relations division resulted in most shareholders disposing of their stock, which led to a fall in prices.
Factors to be considered when judging the Performance of Investor Relations Practitioners
The performance of investor relations practitioners can be judged based on how best they carry out the responsibilities given to them. Besides the stock price, there are a number of factors that can be considered when judging the performance of an investor relations practitioner. One such factor is the liquidity of stock (Engelberg & Parsons 2011, p. 88). A firm’s stock should be easily sold or bought without affecting its price. An investor plays a crucial role in determining whether shareholders will hold on to their stock or sell it. Through creating proper relations between the shareholders and the firm, the confidence levels of the investors in the company will be raised (Gurun & Butler 2012, p. 577).
As a result, most shareholders will not see the need for them to sell their stock. Good investor relations will also be vital in driving up the demand for the shares. As a result, the stock price will be raised. Many new investors will also be willing to buy the stock. Illiquid stock will, in this case, signify poor performance by the investor relations practitioner (Davidson 2010, p. 29).
An investor relations practitioner’s performance can also be judged in terms of their ability to communicate effectively and efficiently (Engelberg & Parsons 2011, p. 69). As such, they will be in a position to add value to a firm. A good investor relations practitioner should be in a position to convince a large number of shareholders. In this case, one should have a good track record (Laskin 2011, p. 320).
An investor relations practitioner who has in the past been found to provide investors with inaccurate information will not be of any benefit to a firm since he or she will always be perceived as dishonest. An investor relations practitioner should also be keen to avoid making mistakes. Wrong information in the corporate world would result in huge losses that would often lead to a drop in share price (Vlittis & Charitou 2012, p. 966). As a result, investor relations practitioners need to consult widely with other specialists within the firm, such as marketer, financial, and public relations officers, before communicating both the financial and non-financial status of the firm.
It is also possible to measure the performance of investor relations practitioners based on the value of the firm. A successful investor relations department will help raise the value of the firm by raising the share price (Mishkin 2013, p. 99).
Good investor relations are considered a competitive advantage in corporate America. In a highly competitive market, those who maintain the value of a firm at a constant are considered to be more successful compared to those whose companies will decrease in value. An investor relations practitioner should be effective in communicating the financial position of the firm to the public, therefore always putting it ahead of its competitors (Westbrook 2014, p. 55. Where the degree of stock liquidity is high, an investor relations practitioner should be keen to increase the demand for the firm’s shares to avoid a decrease in its value.
Conclusion
It is evident that the performance of investor relations practitioners can be judged by firms’ share prices. However, it is not the only factor that can be used in measuring their performance. Other factors that could be assessed in order to determine their performance include the efficiency of their communication, valuation of the firm, as well as the liquidity of the stock. The factors are independent of each other.
For example, the investor relations practitioner can be good at raising a firm’s share price, yet the liquidity of stock remains down and vice versa. Such a firm will not be in a position to attract new investors. The reason behind this is that most investors are not willing to enter an uncompetitive market. Such a situation can occur whereby the practitioner is good at creating better relations between the shareholders and the firm yet poor at driving up the demand for the stock.
References
Bassen, A, Basse, H &Ramaj, H 2010, ‘Investor relations: a comprehensive overview’, Journal fürBetriebswirtschaft, vol. 60 no. 1, pp. 49-79. Web.
Becker, J, Einwiller, S & Medjedovic, J 2014, ‘The effect of incongruence between CEO and corporate brand personality on financial analysts’ attitudes and assessment of a company’s performance’, International Journal of Strategic Communication, vol. 8 no. 3, pp. 146-159. Web.
Bragg, S 2010, Running an effective investor relations department: a comprehensive guide, Wiley, Hoboken. Web.
Brennan, M &Tamarowski, C 2000, ‘Investor relations, liquidity, and stock prices’, Journal of Applied Corporate Finance, vol. 12 no. 1, pp. 26-37. Web.
Davidson, A 2010, How the city really works: the definitive guide to money and investing in London’s Square Mile, Kogan Page, London. Web.
Davis, A 2006, ‘Media effects and the question of the rational audience: lessons from the financial markets’, Media, Culture and Society, vol. 28 no. 4, pp. 603-625. Web.
DeSanto, B & Bradin, D 2011, “Financial public relations”, in D Moss & B DeSanto (eds), Public relations: a managerial perspective, Sage, London, pp. 243-264. Web.
Dougal, C, Engelberg, J, Garcia, D, & Parsons, C. 2011. ‘Journalists and the stock market,’ The Review of Financial Studies, vol. 25 no. 3, pp. 639-679. Web.
Engelberg, J & Parsons, C 2011, ‘The causal impact of media in financial markets’, The Journal of Finance, vol. 66 no. 1, pp. 67-97. Web.
Fang, L & Peress, J 2000, ‘Media coverage and the cross-section of stock returns’, The Journal of Finance, vol. 64 no. 5, pp. 2023-2052. Web.
Griffin, J, Hirschey, N & Kelly, P 2011, ‘How important is the financial media in global markets?’, Review of Financial Studies, vol. 24 no. 12, pp. 3941-3992. Web.
Gurun, U & Butler, A 2012, ‘Don’t believe the hype: local media slant, local advertising, and firm value’, The Journal of Finance, vol. 67 no. 2, pp. 561-597. Web.
Hoffmann, A, Pennings, J & Wies, S 2011, ‘Relationship marketing’s role in managing the firm-investor dyad’, Journal of Business Research, vol. 64 no. 1, pp. 896-903. Web.
Hong, H, Kubik, J & Stein, J 2005, ‘Thy neighbour’s portfolio: word-of-mouth effects in the holdings and trades of money managers’, The Journal of Finance, vol. 60 no. 6, pp. 2801-2824. Web.
Joe, J, Louis, H & Robinson, D 2009, ‘Managers’ and investors’ responses to media exposure of board ineffectiveness’, Journal of Financial and Quantitative Analysis, vol. 44 no. 3, pp. 579-605. Web.
Laskin, A 2009, ‘A descriptive account of the investor relations profession: a national study’, Journal of Business Communication, vol. 46 no. 2, pp. 208-233. Web.
Laskin, A 2011, ‘How investor relations contributes to the corporate bottom line’, Journal of Public Relations Research, vol. 23 no. 3, pp. 302-324. Web.
Mishkin, F 2013, Why study money, banking, and financial markets: the economics of money, banking and financial markets, Pearson, Harlow. Web.
Peasnell, K, Talib, S & Young, S 2011, ‘The fragile returns to investor relations: evidence from a period of declining market confidence’, Accounting and Business Research, vol. 41 no. 1, pp. 69-90. Web.
Petersen, H & Vredenburg, H 2009, ‘Morals or economics?: institutional investor preferences for corporate social responsibility’, Journal of Business Ethics, vol. 90 no. 1, pp. 1-14. Web.
Phillimore, M 2012, “Financial communications”, in A Theaker (ed), The public relations handbook, 4th edn, Routledge, Abingdon, p. 319. Web.
Ragas, M, Laskin, A & Brusch, M 2014, ‘Investor relations measurement: an industry survey’, Journal of Communication Management, vol. 18 no. 2, pp.176-192. Web.
Tetlock, P 2010a, ‘All the news that’s fit to reprint: do investors react to stale information?’, The Review of Financial Studies, vol. 24 no. 5, pp. 1481-1512. Web.
Tetlock, P 2010b, ‘Does public financial news resolve asymmetric information?’, The Review of Financial Studies, vol. 23 no. 9, pp. 3520-3557. Web.
Vlittis, A & Charitou, M 2012, ‘Valuation effect of investor relations investments’, Accounting and Finance, vol. 52 no. 1, pp. 941-970. Web.
Westbrook, I 2014, Strategic financial and investor communication: the stock price story, Routledge, London. Web.
Whitwell, G, Lukas, B & Hill, P 2007, ‘Stock analysts’ assessments of the shareholder value of intangible assets’, Journal of Business Research, vol. 60 no. 1, pp. 84-90. Web.