Publicly listed corporations in the US typically have investor relations (IR) programs that involve providing information to and interfacing with external firm stakeholders. IR encompasses various activities, including preparing and issuing corporate disclosures, managing relationships with current and prospective investors, organizing non-deal roadshows to improve visibility with the street, interfacing with sell-side analysts to evaluate their research and financial models, facilitating quarterly earnings conference calls, and working closely with investment bankers around deals.
When establishing these IR programs, companies must determine whether to invest resources internally or outsource IR to external consultants specializing in IR. In cases where companies outsource IR to the same external consultant, a connection forms between firms such that one consultant is simultaneously responsible for multiple firms’ investor relations (hereafter, common IR representation). In my recent paper, I examine the potential consequences of common IR representation in an effort to better understand whether these connections between companies—often in different industries—are superfluous or have real implications for the companies sharing a representative.
One fundamental component of any IR program involves developing and maintaining relationships with institutional investors and sell-side analysts covering a firm. Consequently, I investigate whether firms with common IR representation have greater common institutional ownership and overlap in their sell-side analyst coverage. Consistent with the notion that IR companies leverage their institutional networks to serve their clients, I find evidence of greater common institutional ownership and sell-side analyst coverage among firms with common IR.
This increase in capital market coverage overlap is substantial. On average, common institutional ownership increases by approximately 0.8 common owners when two firms start having common IR representation. This shift represents an increase of approximately 8% above the baseline 10.4 common owners for other firms without common IR. Considering my sample includes roughly 134,000 instances where two firms have a common IR representative, this increase implies an aggregate of 107,200 common ownership connections resulting from common IR representation.
Below, I present the impact (estimated treatment effect) of common IR representation on common institutional investor ownership in the three years before and after two firms share a common IR representative, where the dotted red line denotes the time in which two firms begin having common IR representation.
The chart highlights how firms exhibit an increase in common ownership in the years after they begin common IR representation.
Regarding overlap in shared sell-side analyst coverage, my estimates are more modest. I find that common IR representation increases the frequency of common analyst coverage, but only so much that about one in fifty firms with common IR representation obtains a common analyst. This increase is reasonable given that sell-side analysts typically specialize by industry, and most of the observable common IR connections are between firms in different industries.
Another pillar of IR programs involves producing corporate disclosures that relay timely financial information to firm stakeholders. Often, a fundamental disclosure by firms is the forward-looking guidance related to their expectations of future financial figures, such as EPS or Sales. Motivated by the fact that IR firms differ in their perspectives on whether firms should provide guidance, I examine whether there is greater alignment of firms’ guidance practices in the years after firms share a common IR representative. Consistent with the notion that IR companies have distinct disclosure styles, I find that firms issue guidance for more of the same income-statement line items when they have a common IR representative (e.g., Gross Margin, Sales, EPS, etc.).
Next, I examine an additional capital market outcome that may be impacted by common IR representation: stock return co-movement. Empirical and theoretical work link common ownership, shared analyst coverage, and disclosure similarity to return co-movement. Consistent with prior work, I predict and find that firms with common IR representation exhibit an increase in daily return co-movement of approximately 3.4%. In further tests, when I control for the common ownership, common analyst, and guidance similarity channels, there is no incremental effect of common IR representation on return co-movement. In other words, common IR representation increases return co-movement through common ownership, analyst coverage, and guidance similarity.
I also assess alternative explanations for the result that firms with common IR representation exhibit increased return co-movement. The traditional view of co-movement is that similarities in the underlying economics between firms drive co-movement. However, given that IR activities typically involve interfacing with firm stakeholders—not influencing operating activities—common IR representation is unlikely to induce similarities between clients’ business operations.
To provide some certainty that the result of heightened co-movement is not driven by converging similarities in clients’ underlying economics, I examine proxies for similarities in the underlying economics between firms around the onset of common IR representation. Inconsistent with economic explanations for co-movement, I find no evidence of greater similarity in the market-to-book ratio, market-capitalization, or profitability for firms with common IR representation.
My results are robust to a battery of alternative specifications and sensitivity analyses. In addition, the majority of common IR representation in my sample are between firms in different industries. This implies that industry-level shocks are unlikely to explain the results of my prior tests. Further, my findings continue to hold when constrained to the subsample of common IR connections between firms in different industries. Finally, I construct control observations using only firms that outsource IR at least once in my sample period to a different IR company, alleviating some concern that my results are contaminated by an omitted variable that determines whether firms outsource IR in general.
My paper contributes to the academic literature and to practice in several ways. First, I develop a method of identifying external IR to document the frequency of outsourcing IR and common IR representation. Using this methodology, I link common IR representation to common ownership, shared analyst coverage, and guidance similarity. These findings add to the broader set of studies examining the interplay between IR activities and capital market participants. My results also suggest that outsourcing IR leads to a different set of stakeholders than if the firm had organically pursued its own IR strategy, which extends prior work.
Second, several recent studies examine information flows between firms through their capital markets connections, such as common institutional ownership or shared analyst coverage. My paper contributes to this line of research by documenting a unique channel through which information flows from an external third party—an IR company—to publicly listed firms. Additionally, my paper broadens our understanding of the institutional relationships between key capital market players (e.g., investors, analysts, and managers) by investigating a relatively understudied information channel in the financial markets.
Third, given that IR companies typically work with smaller or newly public firms and appear to facilitate access to institutional investors, my results shed light on IR companies as a possible gatekeeper to capital markets. Specifically, my paper highlights IR companies’ ability to assist or obstruct potential clients in aiding or denying their access to institutional investors and sell-side analysts.
In summary, common IR representation appears to connect many firms with common investors and analysts, make the firms’ disclosures more similar, and induce comovement in equity returns.
David Volant is an Assistant Professor of Accounting at Indiana University’s Kelley School of Business.
This post is adapted from his paper “Common Investor Relations Representation,” available on SSRN.
