Does Investor Relations Add Value?

Abstract

IR professionals argue that good investor relations contributes to the “fair valuation of firms”. We test the proposition that effective communication of accounting and other firm-specific information enhances firm value directly employing a unique and large database of firms nominated for Investor Relations Magazine’s ‘best overall IR’ awards measuring investor relations quality. We find firms perceived by investment professionals as having superior IR have increased analyst following, and improved liquidity in the year after award nominations. Effective IR also leads to subsequent positive abnormal returns, and such firms are additionally rewarded with significantly higher valuation multiples within the Ohlson (1995) framework. Overall, our findings are strongest for smaller firms which are more likely to be ‘neglected’. Our evidence is consistent with good IR successfully reducing the risk to investors associated with high information asymmetry. We also find our results are unlikely to be driven by potential sample selection bias.