Below are my reflective thoughts of the role of investor relations in business today.
This is a reaction paper to three articles: “A descriptive account of the investor relations profession: a national study” by Laskin (2009), “A review of IPO activity, pricing, and allocations” by Ritter & Welch, and to “Instrumental and/or deliberative? A typology of CSR communication tools” by Seele and Lock. I will introduce the main ideas of the articles supported with my personal views to the issues discussed.
Laskin reviews comprehensively the nature of investor relations; its role historically and why and how this role has been reshaped in the past years. He claims that investor relations today cannot be categorized into its own separate box; building interactive relationships and trust with stakeholders is the main function of IR today. Ritter & Welch contribute to research of IPOs; they seek to find patterns on why companies tend to underprice their stock in initial public offering. First, they argue that the long-run performance of IPOs is highly sensitive to the choice of sample period. Thus, time-variation in research deserves higher emphasis. Further, asymmetric information theories are unlikely to be the primary determinant of fluctuations in IPO activity and underpricing. In other words, there is no single dominant theoretical cause for underpricing. Seele & Lock argue that CSR today is strongly dependent on effective communication; main goal of CSR communication is to build moral legitimacy in the eyes of stakeholders. For this aim, authors present a toolbox for corporations to engage their stakeholders in two-way communication. They claim that meeting the expectations and satisfying needs and informational interests of stakeholders is the main function of CSR. I will discuss these issues in more detail below. I will then present some final conclusions of the nature of investor relations today, based on my personal view supported by the articles discussed.
2.0. Reaction I: “A descriptive account of the investor relations profession: a national study” Laskin (2009)
2.1. Introduction: IR historically
Laskin states that the corporate scandals that shook the U.S. investment market (e.g. Enron in 2001) have resulted investor relations receiving heavy attention from the public. These scandals made shareholders think more carefully their investments in companies as well as wanting to get involved in decision-making. Consequently, the function of communication has changed significantly to adapt the demands of share- and other stakeholders. Laxis argues: “In the post-Enron era, investor relations vaults to the top of the corporate agenda, as companies must begin to rebuild investor confidence”. How I see it, a company cannot exist without its stakeholders; having their trust, support and engagement is vital for its survival. Thus, investor relations is all about having a mutually beneficial relationship with the stakeholders.
2.2. IR today: finding synergies in merged finance and communication
As said, communication and relationship building is now more important than ever. Laxis argues that a communications professional is likely to be able to communicate more effectively and understandably to the investor. Thus, cooperation between financial and communication department is crucial. Effective IR reduces uncertainty and lowers the risk premium that investor demand for their investment. IRO’s need to provide investors with reliable information about the company to let investors make an informed decision. I strongly agree with Laxis’ view; investor relations will highly benefit when finance and communication expertise is merged in a company to develop targeted and effective strategic communications programs.
2.3. Acknowledging all stakeholder groups
Laxis argues that it is increasingly important for a company to speak in a unified and coordinated voice to all of its publics. Though I agree that it is vital to communicate not only to shareholders but all stakeholder groups, I however, do not agree that this should be done in a unified voice to all. Rather, due to their different interests, investor relations’ task is to provide relevant information to each group considering their individual information needs.
I believe that companies are widely realizing that IR today is all about satisfying the informational needs of stakeholders, according their interests towards the company. Thus many companies are outsourcing IR to professional communication agencies. Growing trends are, to mention some, CSR as well as storytelling in annual reporting and marketing strategy.
Laxis claims that investor relations cannot be categorized into its own separate box anymore. Building relationships – trust – with stakeholders is the main function of IR. In order to succeed in this, effective cooperation between communication and finance departments is necessary. Optimally, communication is not a separate business unit but tied to each business function in the company. In my opinion, even the term department is outdated; companies should integrate its functions and avoid categorizing them in order to reach maximum synergies between different expertises among the company’s human capital.
3.0. Reaction 2: “A review of IPO activity, pricing, and allocations” Ritter & Welch (2002)
Ritter and Welch state that a strong trend has been noticed in research: at the end of the first day of trading, shares have traded almost 20% above the price at which the company sold them. IPOs have returned on average 23% percent for an investor buying shares at the first-day closing price and holding them for three years. However, over three years, the average IPO underperformed the market index by 23%. This is naturally is paradoxical. The article seeks to find explanations for patterns in issuing activity, underpricing, and long-run underperformance. For a non-finance professional, the research method used remains relatively complex and challenging to grasp. How I understand it, the authors conducted a literature review on the earlier research of the issues on hand.
3.2. IPO activity: Why do firms go public?
The main reason for a company to go public is to raise equity capital. Also, the risk of ownership is spread among a large group of shareholders. This is especially important when a company grows: original shareholders wanting to cash in some of their profits while still retaining their ownership. Ritter & Welch argue that the most important factor in the decision to go public is favorable market conditions, however, only if they are beyond a certain stage in their life cycle. By favorable market conditions, I understand to be the state of company’s surrounding environment – economical factors such as gas price, trends in the field the company is operating on and so on. I personally believe that another reason for a firm wanting to go public is its desire to get access to a new market. It is important for a company to consider on which stock exchange to list. Each stock exchange has their special knowledge; for example, Norwegian exchange is professional in oil-related matters. Further, by listing itself, the firm achieves higher credibility and recognition.
3.3. What influences investors’ behavior?
Research shows that first-day returns and underpricing has correlated highly for decades. Ritter & Welch further argue that IPOs of operating companies are underpriced, on average, in all countries. When decision of going public is made, the firm hires an investment bank to make the IPO happen. The bank spreads awareness of the listing for investors and based on investors’ estimated demand and desirability, a stock price is set. After the first day of free stock exchange, it can be seen whether the stock was over- or underpriced.
Welch & Ritter suggest winner’s curse as one explanation for underpricing; in this case, the investor holds more information than issuer. Thus, issuer faces a placement problem; not knowing the price the marker is willing to bear. Another kind of issue is an informational cascade, in which investors only request shares when they believe the offering is hot. Pricing too high leaves the issuer with a high chance of failure: investors withdraw because other investors withdraw. As already stated, as a non-finance professional, I find it challenging to form a view for the reasons behind the phenomenon of underpricing. Further, as presented in the conclusions, even the authors could not find a theoretical explanation, based on their comprehensive research work.
Underpricing is a persistent feature of the IPO market. While asymmetric information models have been popular among academics, the authors feel that these models have been overemphasized. Welch & Ritter favor the behavioral point of view, presented above, in the research of long-run performance in IPOs. However, they emphasize being cautious with generalization of these views. Long-run performance of IPOs is highly sensitive to the choice of sample period; thus, time-variation in research deserves higher emphasis. Further, they argue that asymmetric information theories are unlikely to be the primary determinant of fluctuations in IPO activity and underpricing. To conclude, the authors argue that there is no single dominant theoretical cause for underpricing.
4.0. Reaction III: “Instrumental and/or Deliberative? A Typology of CSR Communication Tools” by Seele & Lock (2014)
Scherer & Palazzo state the firms are taking a new political role as global corporate citizens; helping to solve public issues in cooperation with stakeholders while conducting profitable business. According to Seele & Lock, political approach to CSR refers to not only the economic, social and environmental, but also political responsibilities that corporations bear in the globalized economy. They state that successful CSR is strongly dependent on communication. Its main goal is to build moral legitimacy with its stakeholders; satisfying whatever needs and informational interests they might have for the company. For this aim, the authors present a toolbox providing directions for corporations on how to engage their stakeholders to company’s activities. My view is very much in line with the authors’; CSR today is all about acknowledging and meeting the versatile needs that different stakeholders groups have.
4.2. Credibility gap & moral legitimacy
Credibility gap, how I see it, refers to information asymmetry that stakeholders believe to hold between themselves and the company. Stakeholders have different expectations and interest for the company. Naturally, a company cannot exist without stakeholders. Thus, it is crucial for the company to establish CSR communication that builds a base for a mutually beneficial relationship between these partners. For this aim, the authors claim that open discourse, participation, transparency, and accountability are needed to get the CSR messages across to stakeholders. Further, reaching consensus is seen as the core element; company should seek ways to enable stakeholders to engage in a dialogue. The moral legitimacy obtained in this discourse depends on credibility as suggested by the authors. If truth, sincerity, appropriateness, and understandability are present in CSR communication, consensus, understanding, and credibility will be reached.
Authors argue that two-way communication and reaching consensus with stakeholders is in the core of CSR communication. Further, open discourse, participation, transparency and accountability are key components in building credible CSR. The tools provided by authors can be used as part of the bigger picture on how companies may handle their responsibility to society. Authors emphasize importance of closing the gap of credibility; meeting the expectations and satisfying needs and informational interests of stakeholders.
How I see it, a business today cannot be successful without full support of its stakeholders. Investor relations is not about satisfying the informational needs of purely investors, but rather all stakeholder groups. Figure 1 is a simple illustration of different stakeholder groups:
Its goal is to address needs of stakeholders, as well as to engage them to two-way value-adding communication. Thus, IR is all about having a mutually beneficial relationship with the stakeholders. In order to succeed in this, effective cooperation between different departments is needed; communication is not a separate business unit, but rather tied to each business function. In my opinion, companies should avoid categorizing its functions in order to reach maximum synergies among the company’s human capital.
Laskin, Alexander V. 2009. A descriptive account of the investor relations profession: a national study. Journal of Business Communication 46: 2, 208–233.
Ritter, J.R. and Welch, I. 2002. A review of IPO activity, pricing, and allocations. Journal of Finance LVII: 4, 1795-1828.
Seele, P. ad Lock, I. 2014. Instrumental and/or deliberative? A typology of CSR communication tools. Journal of Business Ethics.
Investor Relations: Pre-examination