Wall Street Analysts Explore a New Career Path
This post originally appeared in Money Stuff.
Here are a blog post and related paper by Ole-Kristian Hope, Zhongwei Huang and Rucsandra Moldovan, titled "Economic Consequences of Hiring Wall Street Analysts as Investor Relations Officers." That is of course a career path: If you are a Wall Street sell-side analyst writing research reports to help investors understand a company, you might end up getting hired by that company (or some other company) to help it explain itself to analysts and investors.
The authors describe the benefits to companies of hiring analysts to run investor relations. For one thing, they tend to improve the writing style of a company's disclosure -- making it less complex and more readable -- presumably because, if they weren't writing the disclosure, the lawyers would be.
But here are the real benefits:
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.
The ex-analyst IR person knows the analysts who cover the company; they used to be her colleagues and competitors. She knows the investors who invest in the company; they used to be her clients. She knows what analysts want, and what investors want. When they call her to ask "hey can you help me with this bit of my model" or "hey can you give me more color on your margins" or "hey your competitor posted good revenue growth, should we assume your numbers are similar" or whatever, she will have the ability and inclination to be helpful.
We talk about those interactions a lot. Here are a few things we can say about them:
- They are useful to the investors who have them. That's why investors like to talk to companies: It gives them information that is useful to them in their trading. It gives them an advantage over investors who don't have those "close relationships" with corporate management.
- They are not supposed to be useful to investors. Or rather they are not supposed to be "material." Regulation FD prohibits companies from disclosing material nonpublic information to favored shareholders, without disclosing it to everyone. And yet these private meetings happen, and they seem to be useful, and almost never lead to Regulation FD enforcement.
- They are useful to the companies who have them. That is a result of Hope, Huang and Moldovan's paper: The IR officers' close relationships with analysts lead to more analyst and investor interest in the company and more liquidity in its stock. Those are things that the company could reasonably want, since they could lead to higher stock prices and easier financing terms.
- Every so often they lead to insider-trading charges: The IR officers cultivate such close relationships with analysts or investors, and give those analysts or investors such useful information, that prosecutors decide to characterize the information as a "tip" and the relationship as a "friendship" that creates a "personal benefit" for the IR officer.
- But those characterizations are, I think wrong. Instead, what I think happens is pretty much what Hope, Huang and Moldovan suggest. The job of the IR people is to cultivate relationships with investors, which they do in all the ways people normally cultivate business relationships: They give the investors useful business-y information, and they also ask about their personal lives and try to socialize together. This helps the investors' companies -- they get to buy stock with useful information -- and it helps the IR people's companies -- they get to cultivate loyal investors and have better access to financing. It is all very normal and business-y except that it is legally quite shadowy.
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