Investors Pay Extra for Companies with Good IR

We've suspected this to be true for years, but now a study by a respected IR Professional Association (IRPAS) proved it: Fund Managers will pay a premium for the shares of Companies with good Investor Relations (IR).

About 66% of the respondents of the study said they would pay a premium of up to 15%, while another 24% are willing to pay a premium of more than 15%. A 15% premium translates into $75M for a mid-cap company with a market value of $500M.

IRPAS's general manager, Joseph Chia, noted that the study confirm that investors do value good IR and that the quality they most valued was the credibility of the management and IR officers. "This drives home the point that good IR requires a company to build credibility and trust over the long term. It is not just an ad-hoc activity that a company engages in only when it has good news to share or when it needs to raise funds."

The study supports prior ones, that found that corporations which communicate timely, accurate and complete information increase analysts' confidence in their ability to forecast earnings, (Farragher, 1994) which increases institutional investor's willingness to invest in a company that provides well-organized IR (Craven and Marston,1997).

Further, financial reputation is increasingly important to stakeholders as it can improve overall corporate performance by enabling a company to attract quality employees, lower costs, increase prices and create competitive barriers (Dolphin, 2003).

Investors to Die For

Every customer isn't equal, and neither is every investor. Companies sometimes should "fire" customers, because keeping them is unprofitable. Similarly, traders who dump stock when a company hits a speed bump are far less desirable than investors who are in for the long-haul.

In order to build the company's market value, the IR department of Lambert Warner took on a strategy of targeting investors who have investment goals that are consistent with those of the company. Operationally this meant people known to turn over less than 30% of their portfolio a year and keep stocks for an average of three years. By cultivating these investors, they were able to improve the profile of their investors, and boost their P/E relative to looks for investors.

It takes more work for the IR team to find "investors to die for," but the results are worth it.