For any publicly listed company, strategic planning, diligent execution, and building strong relationships is fundamental. Thus, Investor Relations (IR) teams are invaluable assets for companies seeking growth and stability. There is plenty of evidence supporting the notion that getting the right message out there is beneficial, particularly on the following four fronts:
Stock Price appreciation and greater liquidity:
Maintaining open lines of communication with the investment community can increase demand for a company’s stock by enhancing its reputation and credibility in the market. Investors are more likely to trust and invest in a company that is transparent and responsive to their queries and concerns. According to Bain & Company, involving investors and actually using their feedback can boost your stock price by a significant amount (in their example, around 35%).
Improved analyst coverage:
Sell- and buy-side analysts need to be able to talk to someone on the inside to better understand a company’s long-term vision and value proposition. For this same reason, companies with IR teams consistently receive more analyst coverage than those without a team, or with the wrong team structure. And research has shown how analyst’s coverage reduces market impact costs (see an example here).
Mitigation of market volatility:
IR teams can act as a buffer when markets are volatile, ensuring that investors receive accurate and timely information. Companies with effective IR teams are better equipped to manage market fluctuations, resulting in fewer extreme stock price movements. There are many academic papers that have evidence on this (such as this study on Twitter activity and sentiment versus individual-level stock return volatility), and just how relevant it is to make sure the market understands what is going on with your company.
Lower cost of capital:
According to research from McKinsey, companies can experience a 20-30% discount to NAV when investors can’t properly point out the sources of value creation. IR teams help educate the market as to where those sources are.
- Identify and address the biases that affect your valuation and be able to respond to them with data, fundamentals, and case studies. Address any “value gap” issues openly.
- You must have a clear and consistent equity story that conveys your company’s differentiators, strategy, and growth potential. Otherwise, it’s hard to build the right understanding of and loyalty to your company.
- Make sure that investors and analysts see their feedback reflected in your company’s communication and choices with time. This is a great incentive for them to stay in touch with your IR team.
- Whenever your IR team engages with investors, it is key for them to understand their specific preferences and expectations, as well as address their concerns.
- Tools like media monitoring or perception studies can assist in measuring message absorption and market perception, providing valuable insights to evaluate the effectiveness of IR strategies. Stock valuation and sell-side information accuracy are also key indicators to look out for.
- Bain and Company: https://www.bain.com/how-we-help/how-a-strategic-approach-to-investor-relations-can-unlock-intrinsic-value/
- Cornell University: https://www.johnson.cornell.edu/wp-content/uploads/sites/3/2019/09/The-Theory-and-Practice-of-Investor-Relations.pdf
- Harvard Business Review: https://hbr.org/2021/07/engaging-with-your-investors
- McKinsey: https://www.mckinsey.com/client_service/corporate_finance/latest_thinking/mckinsey_on_finance/~/media/FA13CECC4AA5422AB7822CA6BD116FAA.ashx
- Q4: https://q4blog.com/investor-relations-kpis-how-to-measure-success/
- Science Direct: https://www.sciencedirect.com/science/article/abs/pii/S0378426618302115
Contacts at Miranda Partners