The Impact of Effective Investor Relations on Market Value

In this first study to test formally the market value of investor relations (IR) activity, we employ the annual US Investor Relations Magazine Investor Relations Awards from 2000 to 2002 to proxy for the quality of firm investor relations. We find firms perceived to have the most effective IR strategies earn superior abnormal returns, both before and after the nominations. This shows that while the nominations themselves may be influenced by past performance to some extent, they are nonetheless also associated with subsequent positive abnormal returns. We also find that not surprisingly, higher analyst following is associated with more nominations suggesting analysts tend to favour the stocks they follow. Consistent with effective IR leading to lower information risk, liquidity of nominated firms increases, and their cost of equity reduces significantly in the year subsequent to the nominations. Overall, our evidence is consistent with effective IR successfully reducing risks associated with high information asymmetry, as predicted by information risk and agency theories.