Investor relations (IR) connects the preparers of financial information with its users, aiming to facilitate efficient and effective interaction between the firm and the investment community. Historically, the IR function has been viewed as a communications role, and the investor relations officer (IRO) has had a background or training in communications and public relations. Recently, however, more companies turn to Wall Street to fill IR positions. For example, in a recent step toward a much-anticipated IPO, Spotify hired a former Wall Street veteran who had run the internet and media research groups at Barclays as head of IR.[1] A National Investor Relations Institute (NIRI) survey found that 22 percent of the surveyed IROs working for Fortune 500 companies in 2014 were former sell-side or buy-side analysts, up from 10 percent in 2008.[2] Out of the 610 IROs of U.S. listed companies surveyed for an academic study in September 2016, 30 percent reported experience in investment banking or sell-side research.[3]

The practical value and implications of this trend have stirred debate in the business media. While companies claim to recruit former analysts as IROs to “talk to investors in their own language,” some worry that former analysts may struggle to adapt to the corporate world or not be well-equipped for the completely different requirements of the IRO position.[4] Given the important role played by IROs in communicating financial information to the investors, and the fact that analysts are considered primary users of such information, our recent study, available here, provides evidence to better understand the relation between IROs’ experience as financial analysts and the effectiveness of the IR function.

We collect information from LinkedIn, S&P Capital IQ, RelationshipScience.com, appointment press releases, and manually compile a unique dataset of employment history and biographical information for persons occupying the position of head of IR from 2004 to 2016 in non-financial companies that are included in the S&P 500 market index. Our sample contains 452 changes in IROs, of which 118 cases involve appointing an IRO who used to be a financial analyst. Our research design exploits the change in IROs, benchmarks against a matched control sample, and controls for potential reasons to hire a former analyst as IRO to isolate the influence of an analyst-turned-IRO versus that of an IRO with a more traditional background.

Hiring former analysts as IROs could change corporate disclosure in a way that is welcomed by the investment community. We find that the experience that former analysts have in reading countless corporate disclosures enables them to improve the disclosures their new employer makes. Comparing the characteristics of 8-K filings on the criteria set out in the SEC’s Plain English Disclosure Final Rules 421(b) and 421(d), we find that after hiring former analysts to head the IR function, 8-K filings become shorter, include fewer complex words, contain a smaller percentage of uncertain financial terms, and are more readable overall.[5]

We also find evidence that analysts-turned-IROs initiate new types of disclosure events such as analyst and investor days for their new employers. During analyst and investor days, companies host financial analysts and investors, usually on company premises, and guests interact with firm representatives occupying a wide range of positions in top- and mid-level management. Analysts-turned-IROs likely have a deep understanding of how such events help companies to communicate with the investment community.

Building and maintaining close relationships with financial analysts and institutional investors is a major focus of the IR function. Prior research shows that analyst coverage and institutional ownership are increasing in corporate disclosure, consistent with the notion that the effort analysts expend to analyze the firm is an important determinant of analyst coverage. An analyst has expertise in processing corporate disclosure and understands good-versus-bad disclosure practices from the perspective of investors. If a firm capitalizes on such expertise and deep understanding by hiring a former analyst as head of IR and reshapes corporate disclosure and the way the firm’s story is communicated, the investment community would likely incur lower costs to process corporate disclosure. Consistent with this line of thought, our findings show that firms attract more interest from analysts and institutional investors after hiring a former financial analyst as IRO. In particular, we find a significant increase in analyst following and an increase in the number of institutional owners.

Next, we examine changes in liquidity following the recruitment of new IROs from Wall Street. Extant studies predict and find that stock liquidity is increasing with the quality of firm communication. Using two measures of liquidity, we find an increase in stock liquidity following the recruitment of former analysts as IROs.

What is intriguing is that the increase in analyst following, institutional owners, or stock liquidity is not explained by the changes in disclosure readability surrounding the IRO change, which suggests that it is not merely improved disclosure that leads to the effect we find for analysts-turned-IROs.

Our study adds to a small but growing stream of literature that examines the roles of the IR function and the IR process. To the best of our knowledge, ours is the first study that examines the role of personal characteristics of IROs. We add to this literature by documenting that the quality and availability of information increases following the recruitment of former analysts who have first-hand experience and understanding of how the investment community uses and assesses financial information as IROs. Our results should be useful to managers seeking to improve communications with investors.

An emerging literature on financial analysts’ career outcomes focuses on the dark side (e.g., conflict of interests generated from “revolving-doors”) of analysts’ career progressions from financial intermediaries to senior management or board membership in corporations. We examine what happens after the career move and do not limit ourselves to the analysts who go through the “revolving door,” thus portraying a more complete picture of this practice. We show that former analysts with experience in reading and analyzing complex corporate disclosure, and who understand what the investment community needs from firms, bring significant benefits to their new employers.

ENDNOTES

[1] https://www.cnbc.com/2016/06/17/spotify-moves-closer-to-an-ipo-by-hiring-a-head-of-investor-relations.html

[2] https://www.kornferry.com/institute/investor-relations-officers-201415-survey-ir-leaders-fortune-500 and https://www.kornferry.com/institute/295-the-investor-relations-officer-a-2010-survey-of-fortune-500-companies

[3] Brown, L. D., Call, A. C., Clement, M. B., and Sharp, N. Y. (2017). Managing the Narrative: Investor Relations Officers and Corporate Disclosure. Working Paper. Retrieved from https://ssrn.com/abstract=2934937

[4] https://www.wsj.com/article_email/new-set-of-skills-sought-for-investor-relations-1456798033-lMyQjAxMTA2ODA5MTgwMzE5Wj?mg=prod/accounts-wsj and https://www.irmagazine.com/articles/people-careers/20824/are-former-sell-siders-locking-out-top-jobs/

[5] According to the Securities and Exchange Commission, form 8-K is a regulated filing in which companies announce major events that shareholders should know about (see https://www.sec.gov/fast-answers/answersform8khtm.html).

This post comes to us from Professor Ole-Kristian Hope at the University of Toronto’s Rotman School of Management, Professor Zhongwei Huang at the City, University of London’s Cass Business School, and Professor Rucsandra Moldovan at Concordia University’s John Molson School of Business. It is based on their recent article, “Economic Consequences of Hiring Wall Street Analysts as Investor Relations Officers,” available here.