"How does good investor relations affect a company's value?" is often an important consideration for many small and medium-sized companies when deciding whether to invest resources in investor relations. Our previous volumes of Inside Investor Relations provided a series of guidelines for a company to establish a good investor relation communication system. However, it requires companies to invest additional resources to build up such a system and create long-term reputations. As a result, many small and medium-sized listed companies would think that there is no need to offer good investor relations and should only focus on company operation, or only communicate with investors when they have better financial performance. In this volume of Inside Investor Relations, we use quantitative data to examine how much additional value the capital market is willing to pay for "good investor relations". This "additional value" enables a company to maximize its shareholder value, as well as raise capital at a lower cost than peers to facilitate its growth.
We agree that the effectiveness of a company's investor relationship management should not be solely measured by stock price, but stock price and valuation are the most direct quantitative indicators. A report(1) issued by IHS Markit in September 2020 pointed out that, comparing 30+ IR Award winners from 2018 and 2019 (as designated by IR Magazine) to 100+ peers, it discovered that award-winning IR programs trade at an average 15% valuation premium to their peers, as well as an average of 5% reduction in share price volatility.
In addition, IR Magazine published a survey report(2) based on responses from 421 buy-side and sell-side analysts and portfolio managers in March 2018, and found that 68% of respondents would apply a premium of 5-10% or more to good investor relations. On the other hand, 71% of respondents assign a discount of 5-10% or more to their share price valuation of companies that practice less-credible investor relations. Besides, it is worth noting that the respondents in the Asia-Pacific region are willing to pay a higher premium to companies with good investor relations than in other regions. 58% of Asia-Pacific respondents add 10-15% or more, compared with 26% in EMEA and 24% in the Americas. (Figure 1)
Figure 1. Source: IR Magazine, 22 March 2018, The Value of IR; Credit: QIC
In fact, earlier studies also indicated similar results. A study(3) jointly conducted by Singapore Management University (SMU) and Investor Relations Professionals Association of Singapore (IRPAS) in 2009 showed that 89% of surveyed Singapore-based fund managers are willing to pay a premium for companies with good investor relations, and 24% are willing to pay a premium of more than 15%. Thus, we believe that good investor relations management is an important tool for companies to maximize their shareholder value, while companies with less credible investor relations may be punished by the capital market with a lower valuation.
Figure 2: Good investor relations can be a powerful tool to create a company's long-term value; Credit: QIC
In summary, investor relations is a good investment. It can mobilize the power of capital market to assist a company in expansion during its growth stage, and moreover, to help a company survive a crisis. Given investors are faced with plenty of investment ideas, it's even more important for small and medium-sized companies to have good investor relations management to attract investors' attention in driving "discovery", and helping investors better understand the company's investment thesis. This long-term communication journey is endless. Regarding how to establish good investor relations communication, please refer to our previous volumes of Inside Investor Relations, including building an effective IR team, constructing an IR plan, investor targeting, key elements of a successful meeting with long-term investors, what to avoid doing for IR management, and measuring the effectiveness of IR program.
Reference:
(1) IHS Markit, 17 September 2020, Investor Relations is a Competitive Advantage
(2) IR Magazine, 22 March 2018, The Value of IR
(3) Lianhe Zaobao, 23 June 2009, Some 90% of fund managers are willing to pay premium for SGX- SMU listed companies with good investor relations
Editor's note:
To give our readers a more in-depth and comprehensive knowledge about investor relations from the investor's perspective, DIGITIMES has invited QIC as a contributing partner to share their insights. The article is the 13th part of the QIC Inside Investor Relations Series, which was originally published on QIC website.)
