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The Role of Marketing in Managing Investor Relations

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 The Role of Marketing in Managing Investor Relations 1

Arvid O. I. Hoffmann a, b, *, Joost M. E. Pennings a, c, d, e and Simone Wies a

a
Department of Finance, School of Business and Economics, Maastricht University, P.O. Box 616, 6200 MD
Maastricht, The Netherlands
b
Network for Studies on Pensions, Aging and Retirement (Netspar), P.O. Box 90153, 5000 LE Tilburg, The
Netherlands
c
Department of Marketing, School of Business and Economics, Maastricht University, P.O. Box 616, 6200 MD
Maastricht, The Netherlands
d
Marketing & Decision Sciences Group of the Office for Futures & Options Research, University of Illinois at
Urbana-Champaign, 326 Mumford Hall, 1301 West Gregory Drive, Urbana, IL, 61801, United States of
America.
e
Department of Marketing and Consumer Behavior, Wageningen University, Hollandseweg 1, 6706 KN
Wageningen, The Netherlands

Abstract: This paper proposes an interdisciplinary conceptual framework showing the role of

marketing in managing investor relations. The framework complements existing marketing-finance

literature by focusing on the different dimensions of the relationship between a company and its

shareholders and by demonstrating how investor relationships form market-based assets. The

framework provides researchers and firms with tools to analyze and manage investor relations in order

to improve financial performance and increase shareholder value by lowering cost of equity capital,

increasing analyst following and stock liquidity, and reducing the number of shareholder activism

incidents. An exploratory study amongst investment relations professionals working at publicly traded

companies in the Euronext 100 stock index demonstrates the empirical validity of the framework and

provides first managerial implications.

Keywords: marketing-finance, investor relations, role of marketing, market-based assets.

* Corresponding author. Tel.: +31 43 38 84 602

E-mail address: a.hoffmann@maastrichtuniversity.nl (Dr. A. O. I. Hoffmann).

1
The authors thank seminar participants at the 2009 MSI “Marketing Strategy meets Wall Street” conference at
Emory University, Atlanta for useful comments and suggestions on previous versions of this paper. Any
remaining errors are our own.
1
1. Introduction

Increasing debate attests the declining influence of the marketing function within the

organization (Verhoef & Leeflang 2009), as illustrated by reduced budgets, head count, and

confidence (Webster et al. 2005). This undermined credibility is often attributed to

marketing‟s lack to be held accountable (Rust et al. 2004), and to visibly contribute to

shareholder value creation (Day & Fahey 1988). A significant proportion of firm value is

captured in intangibles under marketing control, such as customer or brand equity (Srivastava

et al. 1998). In companies like Disney or McDonald‟s, these intangible assets constitute more

than 60% of their market capitalization (Doyle 2000). As such, the marketing function

controls a great portion of organizations‟ wealth. Nevertheless, the discipline has been

reluctant in incorporating shareholder value principles when comparing strategy alternatives

or assessing their success (Doyle 2000).

To counter marketing‟s decline (Verhoef & Leeflang 2009; Webster et al. 2005), it is

pivotal that marketing managers understand the holistic relationship between their individual

strategy, competitive advantage and shareholder value creation, and not merely a single

variable of the triangle (Day & Fahey 1990). Empirical studies have shown the link between

marketing assets and stock market performance (Srinivasan & Hanssens 2009). The notion of

market-based assets aims to integrate these existing but often overlooked linkages between

marketing and the financial well-being of the firm (Srivastava et al. 1998). By employing

internal resources, the firm creates (relational) assets that materialize in value when

commingling with entities in the external environment (Srivastava et al. 1998). According to

resource-based theory, organizations engage in relationships with compatible partners in order

to effectively and efficiently pool scarce resources and therewith create a relation-based

competitive advantage (Morgan & Hunt 1999). Investment capital is one such key resource

which is in scarce supply. Nurturing the relationships with its providers – the investors –

should therefore receive considerable attention from both corporations and its marketers.
2
 Although marketing‟s conceptual and methodological approaches might be applicable to

this form of exchange relationship (Lovett & MacDonald 2005), the shareholder as relational

marketing group has so far been neglected by academicians and practitioners in this field.

This is surprising, since shareholders as owners of the firm ultimately bear the cost of

marketing‟s decisions (Zingales 2000). As such, they (should) have a significant impact on

the design and execution of marketing strategy (Srinivasan & Hanssens 2009), and be

represented amongst marketing‟s key external stakeholders (cf. Srivastava et al. 1998).

Moreover, investor relations (IR) initiatives have been shown to be potential drivers of

shareholder value. Several studies examined how effective IR programs can enhance demand

in the firm‟s shares, lower the cost of capital (Botosan 1997), increase trading volume and

liquidity of securities (Healy et al. 1999), or enhance analyst following (Francis et al. 1998).

Similarly, investor relations have been proven to positively influence intangible assets such as

corporate reputation and credibility in the financial marketplace (Gibbins et al. 1990),

therewith stimulating willingness to invest in a company (Craven & Marston 1997). Having a

favorable reputation is argued to be one of the best ways to attract investors (Carter 2006;

Fombrun & Shanley 1990) and can be an intangible resource leading to a sustained

competitive advantage (Deephouse 2000). Hence, IR actions can become powerful tools to

increase overall shareholder value. Studying the management of this function represents a

major research opportunity in marketing (Hanssens et al. 2009).

Investor relations is a strategic management responsibility integrating finance,

communication, and marketing (NIRI 2008). Notwithstanding its strategic importance and

interdisciplinary nature, existing literature on investor relations is scarce (Farragher et al.

1994) and perceives IR either as the financial end of the communications function (Regester

1990) or as the communications end of the financial function (Dolphin 2004). By focusing

exclusively on communication (Marston & Straker 2001), current IR literature ignores the

(strategic) role of marketing. This is unfortunate as the marketing literature offers many
3
valuable insights in this respect and marketers possess skills relevant for managing

interactions with investors and other financial market participants (cf. Lovett & MacDonald

2005). Marketing should use these qualifications more actively, acknowledging the increased

shareholder salience as observed in today‟s financial markets (Lovett & MacDonald 2005).

Although communication of financial information is a necessary condition for managing

investor relations, it is not a sufficient condition considering the dynamic nature and

multidimensionality of these relations.

The current study proposes that to successfully analyze and manage investor relations,

existing management and IR literature needs to be completed with insights from marketing. T

We show how the relationship between a company and its shareholders may be analyzed and

managed from a relationship marketing and stakeholder perspective, hence recognizing the

“investor community as a customer” (cf. Hanssens et al. 2009: 115).1 By explicitly focusing

on the different dimensions of the relationship between a company and its shareholders and

marketing‟s role in managing this, we complement existing literature on the marketing-

finance interface and IR management. We analyze to which extent IR management is related

to IR quality measures and resulting capital market outcomes. 2 Specifically, we investigate

the relationship between a company‟s relationship perspective towards its investors (in terms

of relationship orientation and evaluation, trust, commitment, and reciprocity), and IR

management quality as materialized in IR outcomes in the financial marketplace (i.e. cost of

equity capital, liquidity of stock, analyst coverage, and shareholder activism).

The remainder of this paper is structured as follows. First, we discuss the current state of

IR and its role in the organization. Second, we illustrate how marketing complements existing

IR literature. Third, we present the conceptual framework. Fourth, we operationalize this

framework by developing measures to empirically assess IR management quality and IR

1
In the following, we will use the terms “shareholder” and “investor” interchangeably. Although debtors also
contribute capital to the firm, this paper focuses exclusively on equity capital.
2
In the following, we will use the terms “capital market” and “financial marketplace” interchangeably.
4
marketplace outcomes. Fifth, we examine the framework‟s empirical validity by reporting the

results from an exploratory study amongst IR professionals representing large publicly traded

companies included in the Euronext 100 stock index. We conclude by discussing the

framework and its managerial implications, and propose avenues for future research.

2. Investor relations

Traditionally, IR management is concerned with providing current and potential investors and

their partner groups with an accurate portrayal of the firm‟s performance and prospects, so

that they can fairy evaluate the company (Brown 1995; Marston 1996). Since the early 1980s,

IR management gradually emerged as a systematic discipline inside the organization.

Although many companies still subordinate the function‟s task and qualifications to the

finance and to a lesser extent the public relations department (Laskin 2009; Marston &

Straker 2001), the IR function has been globally increasing in scope during the last decades

(Marston & Straker 2001; Rao & Sivakumar 1999). This diffusion results from the pivotal

role that the discipline occupies in the organization, caused by some key developments.

First, expanding equity markets, deregulation policies, global listings on foreign

exchanges, as well as a global orientation of shareholder value creation (e.g., Marston 1996)

increased competitive pressures among capital acquirers. This pressure was raised further

during the course of the current financial crisis which transferred capital into a very scarce

and valuable resource. In addition, corporate scandals at the beginning of the 2000s, as well as

dubious practices observed in the context of the recent subprime crisis have put strong

obligations on companies to rebuild investor confidence. In a similar vein, shareholder

activism and investor emancipation is gaining ground (Gillan & Starks 2007), thereby

questioning management conduct, and challenging the IR function as linkage between the

company and its owners. Finally, we observe a shift in companies‟ asset composition, with an

increasing amount of wealth captured in off-balance-sheet intangibles that are difficult to

5
assess and measure (Whitwell et al. 2007). Likewise, when valuating companies, investors are

increasingly concerned with non-financial aspects, such as corporate social responsibility

(Hockerts & Moir 2004). These developments imply a greater need to inform investors

beyond traditional accounting statements in order to convey the full potential of a firm‟s

strategy and future returns (Whitwell et al. 2007).

Another factor contributing to the discipline‟s diffusion is that the IR function has been

shown to be a potential driver of shareholder value. As already mentioned in the introduction,

a favorable and often cited outcome of IR is a more accurate valuation of the company‟s

securities. IR quality, for instance, decreases information risk by reducing the dispersion of

analysts‟ earnings per share (EPS) forecasts (Farragher et al. 1994). Furthermore, effective IR

programs enhance demand in the firm‟s shares, and lower the cost of capital by reducing

uncertainty and perceived risk (Botosan 1997; Gelb 2000). A second benefit is reflected in

increased trading volume and liquidity of securities (Healy et al. 1999; Hong & Huang 2005).

Another indicator for an effective IR strategy is increased analyst following. Francis et al.

(1998) reveal that corporate presentations to security analysts increase analyst following by

more than 20%. Such presentations also raise general interest of the financial community,

which materializes in an increased number of earnings forecasts and stock recommendations

issued in immediate response to them. Apart from these favorable effects on stock prices, IR

have been proven to positively influence corporate reputation and credibility in the financial

marketplace (e.g., Ellis 1985; Gibbins et al. 1990). This in turn can enhance fundraising

possibilities, improve employee morale and recruiting efforts, and boost sales while

decreasing customer turnover (Ellis 1985). In a similar fashion, IR can impact investor

loyalty, which in turn is expected to reduce the risk of (hostile) takeovers and share price

volatility, and decrease myopic performance emphasis (Helm 2007).

All these benefits deriving from a sound IR management materialize and endure in the

long-term. Hence, investor relations can constitute a strategic tool to build a sustainable
6
competitive advantage (e.g., Allen 2002; National Investor Relations Institute (NIRI) 2002;

Ryder & Regester 1988; Useem 1996). To be successful, IR requires companies to expand

their activities to more “frequent, extensive, proactive and diversified two-way interaction and

communication” (Tuominen 1997: 53). Descriptive studies of current practice, however,

reveal that the majority of IR activities are still dedicated to reactively managing financial

stakeholders‟ requests (Laskin 2009). Firms are reluctant to establish proactive and strategic

interaction flows. The next section elaborates on a relationship marketing approach to IR that

acknowledges the importance of bonding and proactively utilizing relationship management.

3. Marketing and investor relations

During the last two decades, marketing has changed considerably. Leaving the realm of single

transactions towards new dynamic types of relationships, alliances, and networks has shaped

the way marketing is seen and expected to perform (Webster 1992). One of the abundant

definitions of marketing‟s reconceptualization describes its purpose as to “identify and

establish, maintain and enhance, and when necessary terminate relationships with customers

and other parties so that the objectives regarding economic and other variables of all parties

are met” (Grönroos 2007, italics by the authors).

Symbiotic with its new relationship perspective, marketing is more than ever expected to

(visibly) contribute to overall value creation, therewith fulfilling its ultimate purpose of

maximizing shareholder return (Day & Fahey 1988). The latter implies a radical change of

traditional consumer welfare maximization to firm value maximization (Kumar & Petersen

2005). Instead of strictly creating value for customers, firms now have to demonstrate

customer value within the firm (cf. Srivastava et al. 1998). Indeed, the marketing discipline

has acknowledged that it must become financially accountable and able to indicate how its

actions affect bottom line profit as well as overall shareholder value (Lehmann 2004; Rao &

Bharadwaj 2008; Rust et al. 1995; Srivastava et al. 1997).

7
 As a result of this reconceptualization of marketing, a new stream of literature evolved,

explicitly dealing with the marketing-finance interface and the impact of marketing actions on

firm value and stock returns (Srinivasan & Hanssens 2009). Among this, conceptual

frameworks describing the marketing-finance interface and its accountability have been

developed, the most notable being presented by Srivastava et al. (1998). In their seminal work

on the interplay between market-based assets and shareholder value, they propose that

marketing is concerned with the task of developing and managing market-based assets.

Market-based assets are assets arising from the commingling of the firm with entities in its

external environment. They can increase shareholder value by accelerating and enhancing

cash flows, lowering the volatility and vulnerability of cash flows, and increasing the residual

value of cash flows. Irrespective of detailed taxonomies, market-based assets are principally

of two intertwined types: intellectual or relational (Srivastava et al. 1998). Intellectual market-

based assets are the types of unique knowledge a firm has accumulated about its environment

which enables it to achieve a competitive advantage. Relational market-based assets comprise

valuable outcomes of the relationship between the firm and key external stakeholder groups.

Hence, relationships between the organization and its stakeholders such as customers or

channel partners are explicitly regarded as market-based assets and these latter groups have

conventionally been the focus of practitioners and academics (e.g., Coyne & Witter 2002;

Gielens et al. 2008; Gruca & Rego 2005). Although investor relations can constitute an

equipollent market-based asset, recent marketing-finance literature does not explicitly deal

with the relationship between a company and its investors in such a way.

To date, the shareholders as important stakeholder group have been neglected in this

context. This is unfortunate, as the marketing literature offers many valuable insights that are

useful for managing IR. Marketers possess skills that are relevant to manage interactions with

investors and other financial market participants. As communications scholars remark, IR is

inherently a marketing responsibility, constituting a neglected “core element of a coordinated

8
marketing communications strategy” (Dolphin 2004: 27). This encompasses interpreting

investors as customers for the firm‟s “most important product, namely the company itself”

(Ferris 1988: 173). Identifying and segmenting key investors, understanding what drives their

decisions and consequently managing the relationships can predict and shape the impact of

strategy decisions on share price development, and therewith significantly influence

shareholder value (Coyne & Witter 2002). Additionally, research has shown that economic

actors, i.e. both investors and consumers, link experiences obtained in the consumption and

financial markets (Aspara & Tikkanen 2008). Given that consumption market attitudes are

primarily controlled by the marketing function (Kotler & Levy 1969), it seems meaningful to

empower this function to simultaneously shape investment market impressions, which could

be best achieved via the IR touch point. Lovett & MacDonald (2005) support this conjecture,

stressing that the firm can and should directly market to both consumption and financial

markets. The latter authors argue that neglecting marketing to the financial markets may lead

investors to build inaccurate expectations of a firm‟s strategies and opportunities, which may

hinder the firm in acquiring necessary capital and human resources to be leveraged in the

consumption markets.

In brief, marketing as successful management of relational exchanges (Morgan & Hunt

1994) seems naturally designated to support all forms of stakeholder relationships in order to

enhance shareholder value. Considering a broader range of stakeholders than those included

in the classical firm-customer dyad is even regarded as an obligation of the marketing

function by some authors (Polonsky et al. 2002). In this sense, the relationship marketing

literature serves as a natural complement to the existing IR literature, which so far is

dominated by the role of communication and the design of optimal principal-agent contracts

(Dolphin 2004; Lovett & MacDonald 2005; Marston & Straker 2001). A methodology with

the normative aim to develop long-term relational bonds with investors is provided by

Tuominen (1997). In line with the Nordic school approach, the latter author coins the term
9
„investor relationship marketing‟, which is defined as “the continuous, planned, purposeful,

and sustained management activity which identifies, establishes, maintains, and enhances

mutually beneficial long-term relationships between the company and their current and

potential investors, and the investment experts serving them” (Tuominen 1997: 47).

Extending this notion as well as recent work on the marketing-finance interface and

investor relations, we present a conceptual framework that detaches investor relationships

from a mere financial communication domain, and examines them as a market-based asset

with the respective management responsibilities. The framework characterizes the

relationship between a company and its investors using five key dimensions rooted in the

relationship marketing literature. These factors – or relational dimensions – provide

researchers and firms with a toolbox to analyze and manage investor relations. That is, in

addition to describing the nature of their relationship with investors, these factors may serve

as levers or motivators for companies‟ management to change the nature of this relationship,

therewith creating shareholder value.

4. Conceptual framework

Synthesizing the different streams of literature, Figure 1 depicts the conceptual framework

and the role of marketing in analyzing and managing the relationship between a company and

its shareholders. It extends the framework as proposed by Srivastava et al. (1998), and

explicitly includes investor relationships as market-based assets.3 Effective stakeholder

management – including the suppliers of capital – can constitute intangible, socially complex

(i.e. difficult to replicate), resources able to enhance the firm‟s ability to outperform

competitors in terms of long-term value creation (Deephouse 2000; Hillman & Keim 2001).

Rooted in stakeholder theory and organizational ethics, this long-term value viability is

3
Because of their intangible, firm-specific nature, relational and intellectual market-based assets, such as
investor relations, are often rare, difficult to imitate, without perfect substitutes, and of great value to a firm
(Srivastava et al. 2001; Srivastava et al. 1998). These characteristics give these assets the potential to generate
sustained competitive advantages (Barney 1991; Barney et al. 2001).
10
understood as a function of creating balanced benefits for all of the company‟s stakeholders

(Phillips 2003). Preventing conflicts among the different stakeholder groups is expected to

impact and challenge relationship building efforts between a company and its main

stakeholders, which includes shareholders.

The conceptual framework shows several ways how managing investor relationships

contributes to shareholder value, i.e. how positive social interactions in governing economic

interests can enhance the quality of the relationship and its objectives (Larson 1992). Based

on a review of relationship marketing and stakeholder literature we identify and present five

key factors – relational dimensions – that can be used to describe the relationship perspective

the company employs with regard to its shareholders. These relationship dimensions reflect

IR management, and hence scoring highly on these attributes leads to enhanced IR

management quality. Given the presumption that investor relationships are market-based

assets, IR management quality should materialize in improved financial market performance

(IR outcomes), and hence shareholder value. As elaborated before, IR outcomes in the capital

market are represented by analyst following, stock liquidity, cost of equity capital, and

shareholder activism incidents.4 The respective details of the framework are discussed in the

following sections.

<<Insert Figure 1 about here>>

4.1 IR management quality

In the conceptual framework, IR management quality is determined by five relational

dimensions: relationship orientation, relationship evaluation, trust, commitment, and

reciprocity. These variables influence how relationships between the firm and its investors

evolve, and point to companies‟ strategic options to manage these relationships. The choice

4
As discussed in a following section, shareholder activism may be costly and decrease financial performance
and thus ultimately shareholder value in a number of ways.
11
for this subset of aspects describing a relationship stems both from extant popularity in

research (Hunt et al. 2006) and the relevance for the firm-investor dyad as opposed to other

stakeholder relations.

We propose IR management quality to be composed of these five relational dimensions,

and therewith to be positively related to IR outcomes in the financial marketplace. Based on

our conceptual framework, we propose the following overall hypothesis:

H1: The company’s investor relations management quality as composed of the five relational

dimensions is positively related to favorable investor relations outcomes in the financial

marketplace.

The following sections elaborate on the individual relational dimensions, and their respective

impact on overall IR management quality. Subsequent sections will develop the relevant sub-

hypotheses for each IR outcome.

Relationship orientation

Relationship orientation defines and guides a party‟s behavior and responses in relationships

(Deutsch 1982; Hosseini & Brenner 1992), while at the same time the kind of behavior

experienced by the party shapes its relationship orientation (Savage et al. 1991). In line with

the work of Deutsch (1982), we classify a company‟s relationship orientation towards its

shareholders as either being cooperative, individualistic, or competitive.

In a cooperative orientation, the firm takes the welfare of both parties involved into

account by maximizing joint outcomes (Olekalns & Smith 2002) and pursuing positively

linked goals (Tjosvold & Deemer 1981). A cooperative orientation activates an integration

mindset which automatically leads to assimilation in points where no congruence has yet been

established (Stapel & Koomen 2005), reducing the likelihood of future conflicts. This is not

the case when the relationship is subject to an individualistic orientation. Here, the company

12
is striving for maximizing individual success without considering the well-being of its

investor counterpart (Olekalns & Smith 2002). For example, a company guided by an

individualistic orientation may treat investors solely as capital suppliers and ignore their other

needs or concerns with respect to for instance operating environmentally friendly (Hillman &

Keim 2001). This might induce shareholders to sell their stakes, prompting share price

decreases and increased volatility. An amplified form of individualistic orientation is

competitive orientation. Entities with a competitive orientation aim to prevail relatively.

Strategically, the firm now aims to influence its shareholders by employing tools of

dominance, pressure or threat. Goals are negatively linked, meaning that attaining one‟s own

goal interferes with others‟ goals (Tjosvold & Deemer 1981). Examples of the latter form

were found in the course of the current financial crisis when financial service providers were

often accused to follow an individualistic or even competitive orientation, while pretending a

cooperative form (Foxall & Pallister 1998). This might put the financial service industry

under increased pressure to restore confidence and manage their relationships in a more

cooperative fashion (cf. Howcroft et al. 2007). In our framework, more cooperative forms of

relationship orientation of a company towards its investor base leads to a higher score on the

company‟s overall IR management quality.

Relationship evaluation mode

During the course of a relationship, parties evaluate their interactions. Evaluations can be

attributed to either an operational or a strategic relationship evaluation mode. In the corporate

setting, an operative evaluation mode is used when the company is only concerned with

evaluations of short-term cost-benefit or efficiency implications of past interactions instead of

(future) opportunities. In contrast, the strategic evaluation mode focuses on long-term

opportunities of the firm‟s relationship with its shareholders. It regards the relationship itself

as a strategic resource and emphasizes its investment character (Barney 1991; Hall 1993). In

13
other words, under a strategic evaluation mode, investor relations are considered market-

based assets (Srivastava et al. 1998). In our framework, a company‟s adoption of a more

strategic form of relationship evaluation towards its investor base leads to a higher score on

the company‟s overall IR management quality.

Trust

Trust is widely discussed as an important factor in the relationship marketing literature (see

e.g., Moorman et al. 1993; Morgan & Hunt 1994) and is also useful when analyzing the

relationship between a company and its investors. Trust is the willingness of one party to be

vulnerable to the actions of the other party (cf. Mayer et al. 1995). The risk and vulnerability

the firm has to deal with in an investor relations setting relates to the danger of giving shares

in “unfriendly” hands (cf. Mikkelson & Partch 1997).

Trust is shown to generate positive outcomes, as for instance reduced uncertainty in

decision-making, enhanced cooperation (Morgan & Hunt 1994), effective delegation and

shared responsibility (Gundlach et al. 1995), and lower transaction costs (Wicks & Berman

2004). Moreover, trust can exert a positive influence on corporate governance structures and

contracting (Puranam & Vanneste 2009).

The favorable consequences trust is expected to generate rely on different forms of trust.

Several intertwined taxonomies are in use (e.g., Lewicki & Bunker 1995; Rousseau et al.

1998; Shapiro et al. 1992). They all share a progressing nature, originating from mere

economic calculation of costs and benefits, over being able to predict the counterparty‟s

behavior, to a total understanding of each other‟s intentions. Higher forms of trust develop in

a stepwise fashion as the number and the significance of the interactions increases (Lewicki et

al. 2006). In these situations, it will be easier for companies to engage in more deliberate and

long-term exchanges with their shareholders, in which it is understood and accepted that

sometimes one has to invest in a relationship before it is possible to reap profits.

14
Acknowledging the positive effects on market performance, in our framework a company‟s

adoption of higher forms of trust towards its investor base leads to a higher score on the

company‟s overall IR management quality.

Commitment

Commitment is an essential ingredient of successful long-term relationships (Gundlach et al.

1995) and is defined as “an implicit or explicit pledge of relational continuity between

exchange partners” (Dwyer et al. 1987: 19). As a result, the exchange partner believes that an

ongoing relationship with the other partner is so important as to warrant maximum efforts at

maintaining it (Gruen et al. 2000), which also implies a willingness to make short-term

sacrifices to realize longer-term benefits (Dwyer et al. 1987). Commitment is the most

essential element of long-term relational bonds between a company and its investors

(Tuominen 1997), and allows companies to engage in, for example, uncertain new product

development projects with immediate costs, but uncertain and unknown future profit streams.

Many studies demonstrate the positive results of commitment to an organization or entity.

Examples of such positive effects are motivation and involvement (Mowday et al. 1982),

simpler governance structures and monitoring systems (Gundlach et al. 1995), and loyalty

(Kanter 1972). These positive effects might boil down to successful market performance in

form of less perceived risk, cash flow stability or favorable stock recommendations by

analysts. In our framework, a company‟s adoption of higher forms of commitment towards its

investor base leads to a higher score on the company‟s overall IR management quality.

Reciprocity

In social exchange, interaction is enabled by the universal norm of reciprocity, which

describes the shared understanding that giving and taking are repaid in equivalent measures

(Gouldner 1960). Originally stemming from psychology, the concept is increasingly

15
becoming a hallmark of relationship marketing (Sin et al. 2005), being highly related to the

constructs of trust and commitment, and serving as relationship stabilizer (Pervan et al. 2009).

Reciprocal strength determines how relationships evolve over time (Polonsky et al. 2002).

Strong-form reciprocity leads parties‟ interactions to take the form of equivalent and

synchronized “quid pro quo” exchanges, ensuring that the parties are even at every point in

time. It resembles discrete transactions and economic exchanges (e.g., Kolm 2006; Sparrowe

& Liden 1997), and in general does not allow parties to develop strategic initiatives that

require trust of the other party. On the contrary, weak-form reciprocity does not trace every

action in order to balance contribution and benefits. Equivalence and timing of returns are less

important (Sparrowe & Liden 1997). This form is more common for a long-term oriented

relationship, where the parties involved can trust each other, knowing that they will not be

exploited when occasionally contributing more resources than their counterparts.

Reciprocity is a very relevant topic for company-investor relationships and might strongly

affect management‟s decision-making. Consistent with Tangpong & Pesek (2007: 383),

reciprocity creates a “sense of moral obligation” that managers should make an effort to

protect their shareholders‟ interest as reward for their investment contribution. Furthermore,

the norm of reciprocity serves as implicit guarantee that helping shareholders to accomplish

their current goals means equal support for management in the future. In our framework, a

company‟s adoption of weaker forms of reciprocity towards its investor base leads to a higher

score on the company‟s overall IR management quality.

Interactions among relational dimensions

Interaction effects between the relational dimensions are recognized in the relationship

marketing literature, although empirical work often investigates the variables in an

independent fashion (Hunt et al. 2006). In the conceptual framework, we acknowledge that

the relational dimensions may be interdependent and dynamic, constituting both dependent

16
and independent lever variables. For instance, trust may be an antecedent of commitment, or a

strategic relationship evaluation mode may be a prerequisite of a cooperative form of

relationship orientation. More detail on these interactions is provided in the results section.

4.2 IR outcomes

Managing the relational dimensions as outlined in the previous paragraph to increase IR

management quality is expected to result in favorable capital market outcomes, hence IR

outcomes. There is a noteworthy amount of accounting literature on the economic benefits of

voluntary disclosure, the latter constituting a substantial part of investor relations activities

(Graham et al. 2005). Following this stream of literature, we focus on three types of capital

market outcomes conventionally studied: reduced cost of equity capital, improved liquidity of

the company‟s common stock, and increased analyst coverage (cf. Healy & Palepu 2001). We

supplement these measures by shareholder activism incidents and briefly discuss all variables

and their respective hypotheses.

Many studies reveal that provision of more relevant information to investors reduces the

information asymmetries between the investor community and the company, and hence

information risk (Botosan 1997). This in turn leads to two important capital market outcomes

that are part of the conceptual framework we present. First, if information risk is treated as a

non-diversifiable risk factor, standard asset-pricing theory predicts that investors will employ

a lower discount rate when valuing the company‟s future cash flows (Healy & Palepu 2001).

This leads us to postulate the following sub-hypothesis:

H1a: The company’s investor relations management quality as composed of the five

relational dimensions is negatively related to its cost of equity capital.

Second, reduced information asymmetries trigger investors‟ confidence about facing fair price

transactions, which should increase trading and therewith liquidity in the stock (Healy &

17
Palepu 2001). Liquidity refers to an investor‟s ability to buy and sell assets quickly and to

transact a large number of shares without substantially affecting the security‟s price (Elton et

al. 2003). Hence, we formulate the following sub-hypothesis:

H1b: The company’s investor relations management quality as composed of the five

relational dimensions is positively related to its stock liquidity.

A further favorable IR outcome in capital markets is increased analyst coverage. Information

disclosure and active IR management lowers the information acquisition cost for analysts and

other financial intermediaries, and therewith induces a higher coverage (Healy & Palepu

2001). Following this line of reasoning, we come to the following sub-hypothesis:

H1c: The company’s investor relations management quality as composed of the five

relational dimensions is positively related to its analyst coverage.

Finally, we introduce a highly topical capital market measure: shareholder activism incidents.

Shareholder activism can be briefly defined as shareholder response when delegated decision-

making to the company‟s management turns out to be unsatisfactory or ineffective. In line

with Hirschman‟s (1970) terminology, we define shareholder activism as encompassing both

confrontational initiatives actively expressing shareholders‟ dissatisfaction („voice‟), and

shareholders selling their shares as response to any potential dissatisfaction („exit‟). Though

shareholder activism intends to increase shareholder value, there is no empirical evidence that

it actually does (Karpoff 2001; Romano 2002).5 Rather, critics often claim that investor

activists distract management from their actual tasks and duties (Admati et al. 1994), activist

investors might not possess the necessary skills and experience to optimize management

decisions (Wohlstetter 1993), or they may only focus on short-term results at the expense of

5
The evidence of significant financial impact on the target firm is at best mixed, and appears to be highly
influenced by the type of sponsor. Hedge funds seem to be a relatively successful activist group (Brav et al.
2008; Klein & Zur 2006).
18
long-term projects (Karpoff et al. 1996). This turns a company into a less stable and thus more

risky investment, which entails higher costs of capital (Srivastava et al. 1998). Consequently,

many studies conclude that shareholder activism is “disruptive, opportunistic, misguided, and

at best […] ineffective” (Becht et al. 2008: 3). We therefore regard reduced shareholder

activism as a favorable IR outcome and present as a final sub-hypothesis:

H1d: The company’s investor relations management quality as composed of the five

relational dimensions is negatively related to its number of shareholder activism incidents.

4.3 Shareholder value

Ultimately, through their impact on a firm‟s market performance, market-based assets such as

favorable investor relations are valuable because they can increase shareholder value

(Srivastava et al. 1998). For instance, increased liquidity of the firm‟s stock implies less

uncertainty about the fair transaction price and reduced transaction costs (Botosan 1997),

which increases responsiveness in the marketplace, and therewith may accelerate and enhance

capital cash flows (Srivastava et al. 1998). Increased analyst coverage is expected to enhance

stock popularity and lead to higher confidence in its performance, which equally lead to a

lower cost of equity capital, as well as enhanced or accelerated cash flows (Srivastava et al.

1998). Shareholder activism is expected to consume valuable company resources, as well as

generate unstable cash flows, leading to a higher cost of equity capital (Srivastava et al.

1998). Finally, a lower cost of equity capital generates a higher net present value and hence

shareholder value (Srivastava et al. 1998). The impact of market-based assets on shareholder

value creation has repeatedly been shown (e.g., Gruca & Rego 2005; Luo & Donthu 2006),

but is beyond the scope of this paper to validate empirically. Rather, the focus is set on the IR

outcomes that materialize in the financial marketplace. This last restriction is important to

acknowledge as it also implies that the total magnitude of IR management quality on

shareholder value might be underestimated. Investors are simultaneously consumers, so there

19
might be spillover effects to the consumption markets where positive IR management quality

can enhance shareholder value as well (cf. Grullon et al. 2004; Lovett & MacDonald 2005).

The following sections elaborate on the empirical examination of aforementioned

hypotheses. In a first – exploratory – investigation we provide insight to which extent IR

management quality is empirically related to IR outcomes in the financial marketplace.

5. Method

The research design distinguishes between two sets of variables: the relational dimensions

comprising IR management quality and the IR outcomes in the financial marketplace. The

first set of variables is measured using an online survey, collecting data from IR professionals

representing the companies included in the Euronext 100 stock index.6 The second set of

variables – gauging the IR outcomes – is measured by retrieving secondary (accounting) data

and hand-collecting information on shareholder activism incidents. Each is discussed in detail.

5.1 IR management quality

Data collection

We developed an online questionnaire tapping into the five relational dimensions together

comprising IR management quality. Before administering the questionnaire among IR

professionals, we held a pretest among graduate students and consulted an outside expert

panel. The pretest involved 153 students and was used to verify whether respondents

understood the questionnaire procedure, items, and language. After revising item wording and

number, an expert panel of marketing and finance academicians and IR practitioners

confirmed that the items closely resembled the intended constructs.

Subsequently, we collected the empirical data targeting publicly traded companies in the

Euronext zone, encompassing the Netherlands, Belgium, France, Portugal, and the United

6
Since “organizations are made of and managed by individuals and it is through them that interfirm relations come into
effect” (Janowicz & Noorderhaven 2006: 265), we rely on research conventions and assume conduct “qua persona” that is
restricted to the roles the organization has assigned to them (Nooteboom et al. 1997). Thus, we survey investor relations
officers as valid representatives of the overall firm and its perceptions.
20
Kingdom (U.K.). The sample frame consisted of all companies listed in the Euronext 100

stock index on January 27, 2009. Target recipients of the survey were officers in the IR

department. Before sending out actual research invitations, preliminary phone calls were

made to assure the company‟s willingness to participate in the study, and to obtain contact

details from the corresponding IR officers who would complete the survey. After receiving

company permission, a research invitation with the link to the online survey was sent to the

prospective participants by email. Approximately four weeks after the initial invitation, a

wave of reminder emails was sent to all participants that had indicated interest in participating

in our study during the telephone conversations, but had not answered yet. We obtained an

ultimate response rate of 26%, which compares favorably to other online surveys (cf. Aaker et

al. 2007; Ranchhod & Zhou 2001) and related cross-sectional studies, which typically report

response rates of 15-20% (e.g., Churchill 1999; Verhoef & Leeflang 2009).

We tested for non-response bias by comparing early versus late respondents (cf.

Armstrong & Overton 1977). As there were no significant differences in terms of interest

variables between both subsamples, non-response bias is not a concern in our study.

Measurement development

As the existing literature does not provide scales exactly fitting this study‟s purpose, we

adapted existing and developed new scales along the iterative recommendations by Churchill

(1979). Using existing literature, we generated a pool of items for scales previously designed

to measure the relevant constructs in different contexts, and adjusted them syntactically. For

constructs where no satisfying established measures could be found, new items were derived

by examining relevant conceptual papers and theoretical models.

All initial items were standardized in a seven-point Likert scale format, ranging from

strong disagreement (1) to strong agreement (7), and administered in a survey with standard

psychometric procedures (Nunnally & Bernstein 1994). Relationship orientation is measured

21
using six items, adapting existing items from Johnsen et al. (2008), Meyer et al. (1993), and

Wagner (1994). Additionally, management literature on interorganizational relations and

cooperation was consulted to create new items (e.g., Lewicki et al. 2007; Oliver 1990; Ring &

Van De Ven 1994). We assess relationship evaluation by four newly created items inspired

by Palmatier et al. (2008), Bordonaba-Juste & Polo-Redondo (2008), Heide & John (1992),

and Duffy (2008). A set of five trust items that best fitted the purpose of this study was

created using items of Tax et al. (1998), Cummings & Bromiley (1996), and MacMillan et al.

(2005). Commitment was gauged by adapting and developing items inspired by Morgan &

Hunt (1994), Meyer et al. (1993), and Mowday et al. (1979). Finally, reciprocity is measured

by five items along prior items of Parzefall (2008), Pervan et al. (2009), and Moorman et al.

(1993). Table 1 provides an overview of adapted and modified items as used in this study.

<< Insert Table 1 about here >>

Measurement purification

The initial item pool was used in a pretest administered amongst 153 graduate students. The

obtained feedback was used to enhance each item‟s clarity, specificity, and

representativeness. Moreover, the data generated by the pretest was employed to reduce the

number of items per relational construct to avoid respondent‟s fatigue and keep the response

rate high during the final data collection (Deutskens et al. 2004). Care was taken to preserve

multi-item measures. Factor analysis and reliability analysis were used to improve

measurement quality and ensure the data reduction only eliminated poorly fitting items.

We employed exploratory factor analysis (EFA) using standard principal component

procedures (Hair et al. 2006). EFA revealed the presence of mostly two-factor solutions,

explaining on average 72% of variance (Table 2). As recommended by Flynn & Pearcy

(2001), decisions on which items to remove or retain in the final constructs were made in

22
conjunction with reliability and validity analyses, employing standard psychometric

procedures (Netemeyer et al. 2003; Nunnally & Bernstein 1994).

After deleting poorly fitting items, all relational constructs showed sufficient internal

consistency. Factor loadings were either close to or above .70. Every construct‟s reliability as

indicated by Cronbach‟s alpha also exceeded the common threshold of .70 (Hair et al. 2006).

Content validity of the new scales was assured by selecting items based on their proven

affiliation to the general relational construct, as well as professionals‟ and academicians‟

justification as expressed by the previously mentioned expert panel. We tested for convergent

validity by analyzing correlations among the individual items of a single construct. All of the

correlations exceeded .34, and were significant at least at the 5% level. The one-factor

solutions of additional EFAs confirmed the convergent validity of our scales.

We followed Narver & Slater (1990) to measure discriminant validity. Using their

method, discriminant validity was analyzed by proposing substantially lower correlations

between one dimension‟s items with a different dimension‟s items than one dimension‟s items

with its same dimension‟s items. To that end, we built pairs of dimensions that are

theoretically linked, and employed the test for significant differences between dependent

correlations as constructed by Cohen & Cohen (1975). The formula and procedure is

explained in the Appendix. The t-statistics were highly significant, and therewith

demonstrated that the intra-dimension item correlations were indeed higher than inter-

dimension item correlations, thus supporting discriminant validity.

As a final step, we determine the composite score of IR management quality (IRMQ) at

company j as a formative measure (Netemeyer et al. 2003), consisting of the unweighted

average of the five relational dimensions included in this study (i.e. RO, RE, T, C, R):

RO j RE j Tj Cj Rj
IRMQ j (1)
5

23
 << Insert Table 2 about here >>

5.2 IR outcomes in the financial marketplace

Data collection

We collect cost of equity capital, stock liquidity, and analyst coverage using existing financial

data within the Compustat and I/B/E/S databases. The most tangible form of shareholder

activism data are the proposals or resolutions submitted by shareholders. Although

commercial databases monitor these events in the U.S., for Europe a comparable public

database does not exist, and private data is almost impossible to retrieve, given the unique and

often opaque legislation in the different countries.7 After consulting experts in the field of

corporate governance in general and shareholder activism in particular, we decided to opt for

a two-source approach to collect activism data. First, we used the newspaper database of

LexisNexis. The decision to monitor shareholder activism in this form was not only based on

lack of investor proposal data, but also as a means of supplementing the formal data (cf.

Wahal 1996). As many studies confirm, a great deal of activism is not conducted via

proposals, but via private negotiation (Romano 2002) or media attention, called “naming and

shaming” (Gillan & Starks 2007). By the same token, the „exit‟ form of activism is ignored

when solely relying on proposals. Financial newspapers, however, carefully observe all

mentioned events, and thus form a good data source to obtain this information. To find a

reasonable compromise between quality and overlap, the seven most influential European

newspapers in English language were chosen to construct our dataset and subsequently

develop our measure of shareholder activism. Since the U.K. exhibits the highest intensity of

shareholder activism in Europe (Martin et al. 2007), we opted for the four newspapers with

the largest U.K. circulation, namely the Daily Telegraph, The Times (Sunday Times), The

7
One of the contributions of this paper is providing insight into European shareholder activism which – as
opposed to activism in the U.S. – does not appear in current databases and is neglected in the current literature.
24
Guardian, and The Independent (cf. Audit Bureau of Circulation 2009). Continental Europe

was covered with two supranational European newspapers, the Financial Times, and the

European edition of The Wall Street Journal. Second, we examined voting results at former

annual general meetings (AGMs) as this represents a classical form of shareholder activism

(„voice‟). This data was retrieved from reports on the respective corporate webpage, or, if

missing, requested by phone or email.

Measurement development

Following the reasoning of Botosan (2006), we estimate the cost of equity capital as the risk-

adjusted discount rate that investors apply to the firm‟s future cash flows as represented by its

dividends to arrive at the current share price. This notion is captured in the traditional

dividend discount model formula, given by equation 2, where Pt refers to the share‟s current

price, Et (Divt+1) is the next year‟s expected dividend, and r refers to the cost of equity capital.

Et ( Divt 1 )
Pt (2)
t 1 (1 r ) t

As proxy for future cash flows, we collect forecasts of dividends for the next fiscal year (t+1)

as published by I/B/E/S. To complete the cost of equity calculation, we obtain the share price

of the current fiscal year (t=0) from Compustat.

To measure stock liquidity we rely on the average daily trading volume of the companies‟

stock between January and September 2009, which we retrieve from the Compustat database.

Analyst coverage is defined as the number of analyst estimations and recommendations

published per month from January until September 2009. Our source is the I/B/E/S database.

Shareholder activism is measured as the combined number of shareholder activism

incidents that a company encounters between January 2005 and September 2009 as found by

the newspaper data and the voting results at the AGM, taking care to avoid duplicates.

Relevant news events for the companies included in our survey were found by searching for
25
word combinations with the company name and typical expressions, such as “angry

investors”, “shareholders”, “activism”, “corporate governance”, “annual meeting”,

“proposal”, “resolution” and “owners”. We screened former AGM reports for resolutions

submitted for shareholder vote that were not approved and consequently rejected.

Additionally, we included voting results that did not cross the boundary of 75%, which

expresses serious shareholder discontent.

5.3 Sample descriptives

Our sample consists of 26 companies listed on the Euronext stock exchange. At the time of

the survey, these companies have in total €184 billion of common stock outstanding,

representing 18% of the market capitalization of the Euronext 100 stock index. On average,

the market capitalization of the participating companies is €7.18 billion, although there is

wide variation among participants (SD = €4.64 billion). The majority of firms is French (N =

13), followed by Dutch (N = 6) and Belgian (N = 5), and one Portuguese firm (N = 1). The

industry sectors the companies are operating in are divergent, encompassing base materials

and industrials, but also consumer discretionaries and financials.

As disperse as the participating companies are, so are their perceptions about the influence

of their IR department within the firm. When self-estimating the importance of their IR

department vis-à-vis other departments in the organization, participants respond with a

minimum value of 3 and a maximum value of 7 (M = 5.19). Judging the own IR department‟s

influence compared to other companies‟ IR departments lead to similar results with a mean

value of 5.12. As such, the sample comprises a wide spectrum of companies with apparently

strong as well as less strong IR departments, and therefore does not suffer from non-response

bias in the sense that primarily best or worst practice companies are participating in our study.

6. Results

26
Before we test the hypotheses concerning the relationship between IR management quality

and IR marketplace outcomes, we describe the relational dimension results. Table 3 presents

the mean score, as well as related statistics about the distribution of the five relational factors,

to reveal that the spectrum of possible answers is widely employed for most of the constructs.

There is considerable variation in the form of relationship perspective employed towards the

investor population. Only for the relationship evaluation factor, we observe a homogeneous

cluster of answers in the upper part of the scale, revealing a clear strategic relationship

approach. The other constructs‟ results confirm an overall favorable and forward-looking

attitude towards investors. The majority of the companies practice a collaborative form of

relationship orientation, as well as higher forms of trust and commitment. Similarly, most

firms engage in weak-form reciprocity. For most constructs (“commitment” as an exception),

the aggregated responses are normally distributed and only moderately skewed.

<< Insert Table 3 about here >>

To touch upon the previously mentioned notion that the relational dimensions may be

interrelated, we examine the correlations among the five relational factors (Table 4). As

expected, all dimensions are positively correlated. Not all results are statistically significant,

which is likely to be attributed to the limited sample size of this exploratory study. In line

with earlier presented literature, trust and commitment are highly correlated. Moreover,

relationship orientation is significantly correlated with both trust and commitment.

Additionally, relationship evaluation mode is positively correlated with trust, while trust also

correlates positively with reciprocity. The latter two relationships, however, are only

significant at the less restrictive 10% level, while all others are significant at the 5% level.

<< Insert Table 4 about here >>

27
Finally, we test our hypotheses that IR management quality is positively related to favorable

IR outcomes in the financial marketplace. To this end, we conduct a correlation analysis

between the overall IR management quality score and the four IR outcomes: analyst coverage,

stock liquidity, cost of equity capital, and shareholder activism incidents. For reasons of

completeness, we present descriptives of the four IR outcomes in Table 5. Similar to the

survey results, we observe ample variation among the measures. Table 6 reports the

correlations between IR management quality and IR outcomes. Studying the correlation

coefficients reveals that all relations between IR management quality and the studied IR

outcomes are of the expected direction. IR management quality is positively related to trading

volume (i.e. liquidity), as well as analyst coverage, in line with H1b and H1c. In a similar

vein, IR management quality is negatively related to the cost of equity capital, and the number

of shareholder activism incidents, in line with H1a and H1d. Apart from the relationship

between IR management quality and analyst coverage, all results are statistically significant,

either at the 5% or 10% level of significance. Considering our dataset‟s high quality and

uniqueness, surveying real decision-makers as represented by IR professionals working in

Euronext 100 companies, we consider these first results both meaningful and important for

marketing research and practice.

In further sub-analyses, we form terciles of companies based on their IR management

quality scoring, dividing the sample in a best, medium, and worst practice group. We examine

whether these groups of firms differ with regard to country of headquarter location, market

capitalization, or industry membership, but find no significant differences. Figures 2-5 show

the mean plots of the respective IR outcomes against the related IR management quality

groups to further illustrate our prior results. In an intuitive way, the plots confirm the

directions as proposed by the sub-hypotheses. Companies with a high IR management quality

perform better in terms of financial IR outcomes than firms with lower IR management

28
quality. Analyst coverage, trading volume, cost of equity capital, and shareholder activism are

all related in a value-enhancing manner to high IR management quality group membership.

<< Insert Tables 5 and 6 about here >>

<< Insert Figures 2-5 about here >>

7. Conclusion and discussion

7.1 Discussion of results

Using recent insights from the (relationship) marketing, finance, and (stakeholder)

management literature, this paper offers a deeper understanding of IR management quality in

the often neglected European area (cf. Marston 2001). We propose a decomposition of IR

management quality in terms of five relational dimensions: relationship orientation,

relationship evaluation mode, trust, commitment, and reciprocity. Together, these relational

factors form IR management quality and are part of a wider conceptual framework that

describes the role of marketing in analyzing and managing investor relations. It explicitly

extends earlier work by Srivastava et al. (1998) and Srivastava et al. (2001) in treating IR

management quality as a market-based asset that is able to generate favorable IR outcomes in

the financial marketplace. Specifically, we show that higher IR management quality is

positively related to favorable IR outcomes in the capital market. Scoring high on the overall

IR management quality measure is positively correlated with increased analyst coverage,

enhanced stock liquidity, a lower cost of equity capital, and reduced shareholder activism.

Surveying a group of IR professionals, representing large publicly traded European

companies, shows that firms differ with regard to the relationship perspective they employ

towards their investor base. Companies scoring better in terms of IR management quality do

better in terms of IR outcomes, and therewith actively contribute to shareholder value

creation. The findings of our exploratory study extend existing literature in explicitly

acknowledging the role of relationship management and hence the marketing discipline in
29
managing investor relations. The authors call for a more active marketing approach, in which

the marketing function‟s tools are released from compartmentalized isolation and employed to

cross-functionally generate shareholder value. The result is a relational marketing approach to

IR, or as Tuominen (1997: 53) calls it, “investor relationship marketing.”

7.2 Managerial implications

The current study has several implications for researchers, managers, and the role of

marketing. As previously touched upon, marketing is expected to complement traditional IR

responsibilities that are so far static, focused on the status-quo, and limited to the mere

provision of financial information. Regarding IR as relationship management and thus as a

market-based asset changes the way IR is conducted. The presented IR relationship

philosophy goes beyond one-way communication, turning IR management into a dynamic,

forward-looking and two-way relational activity, contributing to favorable IR outcomes and

shareholder value.

The positive relationship between IR management quality and the IR outcomes in the

financial marketplace prescribes a stronger focus on actively managing investor relationships

using marketing insights. The results show that doing so increases a company‟s stock liquidity

and analyst coverage, lowers the cost of equity capital, and reduces shareholder activism.

The proposed framework offers a toolbox that supports IR professionals in systematically

assessing their relationships with the company‟s investors. However, the framework‟s

relational dimensions are interrelated, and may be difficult to disentangle. Since we observe a

high congruency between the trust, commitment, and relationship orientation constructs,

managers may concentrate on managing these factors simultaneously. For instance, regular

meetings with shareholders and other relevant (financial) constituencies might be a viable

vehicle to express a collaborative relationship orientation, while at the same time, trust and

commitment can be nurtured in the course of these interactions. Another illustration might be

30
a transparent and reliable contact strategy that links investors and the company. A proper

institutional design is important to establish and maintain the relational dimensions.

Finally, taking a relational market-based asset perspective on IR does not imply total

dependence of a firm on its given shareholder population. Contrarily, acknowledging IR

management as a market-based asset implies questioning the appropriateness of the current

investor population given the company‟s strategic vision. Indeed, as phrased by Srivastava et

al. (1998: 15), “the market-based assets an organization possesses may not be those it needs”.

7.3 Limitations and future research

This study contains several limitations that provide interesting avenues for further research.

First, the empirical part of this study is of an exploratory nature. Increasing the sample

size allows more advanced statistical techniques and a stronger statistical confirmation of the

hypotheses. Still, the results indicate a valuable direction of how IR management quality can

leverage positive IR outcomes in the capital market, thereby creating shareholder value. This

study provides an indication how investor relationships may function as market-based assets.

Second, an interesting opportunity is to relate (changes in) IR management quality

directly to shareholder value creation. For this purpose, future research may measure investor

response to a company‟s investor relations activities using, for example, four-factor financial

models, event studies, or stock return response models (Srinivasan & Hanssens 2009).

To conclude, this research contributes to a better understanding of IR management

quality, and the role marketing can occupy in this regard. IR merits a systematic management,

precisely a relationship management approach, as our research results of IR outcomes in the

capital market suggest. This can be best achieved by adopting a relationship marketing

perspective. A synthesis of both disciplines promises valuable benefits that can translate into a

sustainable competitive advantage.

31
Figure 1: The conceptual framework

Investor community

IR management IR outcomes Shareholder value

quality
• Cost of equity capital (-)
IR: Managing relational dimensions • Share liquidity (+)
• Analyst coverage (+)
• Relationship orientation
• Shareholder activism
• Relationship evaluation Marketing incidents (-)
• Trust Relationship marketing
• Commitment
Stakeholder theory
• Reciprocity

Company

32
Figure 2: Means plot of analyst coverage against IR management quality

Analyst coverage for IR management quality groups

23.4

23.2

23

22.8

22.6

22.4

22.2

22
1 (worst) 2 (medium) 3 (best)

33
Figure 3: Means plot of trading volume against IR management quality

Daily trading volume for IR management quality

3500000 groups
3000000

2500000

2000000

1500000

1000000

500000

0
1 (worst) 2 (medium) 3 (best)

34
Figure 4: Means plot of cost of equity capital against IR management quality

Cost of equity capital (%) for IR management quality

6.5 groups

5.5

4.5

3.5
1 (worst) 2 (medium) 3 (best)

35
Figure 5: Means plot of shareholder activism against IR management quality

# Shareholder activism incidents for IR management

quality groups
4.5

3.5

2.5

1.5
1 (worst) 2 (medium) 3 (best)

36
 Table 1: Overview of original and modified items used in this study

Construct Original item Study Modified item

Relationship -Do we pursue common goals or interests? Open question Johnsen et al. (2008) -Our investors pursue the same goals or interests as our company.
orientation
-People in a group should be willing to make sacrifices for the Seven-point scale: Wagner et al. (1994) -We are willing to make sacrifices for the sake of a sound
sake of the group‟s well-being. “strongly disagree” relationship with our investors.
to “strongly agree” a

-I feel a responsibility to the nursing profession to continue it. Seven-point scale Meyer et al. (1993) -We feel a sense of responsibility for our investors.

Trust -We think we can depend on X to negotiate with us honestly.
-We think that the people in X use confidential information to
their own advantage.
-We intend to share information cautiously with X to avoid
having them use it to their advantage.
Seven-point scale Cummings & Bromiley -We feel we can depend on our investors to negotiate with us
(1996) honestly.
-We think that our investors may use confidential information to
their own advantage and our disadvantage.
-We intend to share information cautiously with our investors to
avoid having them use it to their advantage and our disadvantage.

-In my opinion, X will be reliable in the future. Seven-point scale Mac Millan et al. (2005) -We can expect our investors to remain reliable partners in the
future.

-I believed the organization could not be relied upon to keep its Five-point scale Tax et al. (1998) -Our investors can be relied upon to act in the very best interest of
promises. our company.

Commitment -The relationship with my major supplier deserves our firm‟s Seven-point scale Morgan & Hunt (1994) -Maintaining the relationship with our investors deserves our
maximum effort to maintain. maximum effort.

-Right now, staying with my organization is rather a matter of Seven-point scale Meyer et al. (1993) -Keeping our current investors is rather a matter of necessity than
necessity as much as desire. desire.

-I feel very little loyalty to this organization. Seven-point scale Mowday et al. (1979) -We feel very little loyalty to our investors.

-I find that my values and the organization‟s values are very Semantic- Jain & Srinivasan (1990) -We find that our values and our investors‟ values are very similar.
similar. differential items: -Our investors‟ characteristics portray an image of us to others.
-Does not portray an image of me to others / Portrays an image of Seven-point scale
me to other.

37
Reciprocity -When my employer treats me favorable, it is important that I
show my appreciation right away.
-If my employer does something extra for me, there is an
expectation that I will do something extra in return.
-My employer would help me to develop myself, even if I cannot
make more contributions at present.
-My researcher is flexible in meeting my needs even if it
sometimes means sacrificing methodological perfection.
-When things go wrong, the party responsible responds openly to
resolve the situation.
-We both respond sympathetically to any problems we may have
caused each other.
-The benefits we provide and receive even out over time.
Note:
a
All items, unless otherwise noted, use Likert scales ranging from “strongly agree” to “strongly disagree”.
Five-point scale Parzefall (2008)
Seven-point scale Pervan, Bove & Johnson
(2009)
Five-point scale Moorman et al. (1993)
38
-When our investors make a valuable contribution to our company,
it is important that we show our appreciation right away.
-If we do something extra for our investors, there is an expectation
that they will do something extra in return.
-We aim to remain flexible in meeting our investors‟ needs, even if
we will not receive contributions at present.
-When things go wrong, both our investors and we respond
sympathetically to any problem we might have caused each other.
-The benefits that we as a company provide to and receive from our
investors even out over time.
 Table 2: Measurement items, factor loadings, and construct reliability

Construct Item wording a Factor loadings αb

Factor 1 Factor 2

Relationship RO_A: We feel a sense of responsibility for our investors .853 -.284 .768
orientation
RO_B: We are willing to share additional information and material with our .798 .206
investors even if it does not translate into a visible advantage for us
RO_C: We are willing to make sacrifices for the sake of a sound relationship .761 .069
with our investors
Our investors pursue the same goals or interests as our company c .665 -.010
The one and only aim with regard to investor management is to raise capital .131 .838
(reversed)c
When talking to our investors, we would consider framing our objectives in -.096 .786
such a way that we can achieve our goals (reversed)*
Relationship RE_A: We are convinced that a good relationship with our investors will pay .947 .006 .891
evaluation off for our company in the future
RE_B: A successful relationship with our shareholders constitutes a sustainable .938 .000
competitive advantage for us
It is impossible to have a successful relationship between a company and a -.148 .894
particular investor in the very long term*
When evaluating how fair and successful the relationship with our investors is, .221 .700
we primarily make short-term cost and benefit trade-offs c
Trust T_A: We can expect our investors to remain reliable partners in the future .949 -.118 .862
T_B: We feel we can depend on our investors to negotiate with us honestly .901 -.165
T_C: Our investors can be relied upon to act in the very best interest of our .816 -.403
company
We think that our investors may use confidential information to their own .042 .924
advantage and our disadvantage (reversed)c
We intend to share information cautiously with our investors to avoid having -.096 .906
them use it to their own advantage and our disadvantage (reversed) c
Commitment C_A: We feel very little loyalty to our investors .850 .104 .822
C_B: Keeping our current investors is rather a matter of necessity than desire .847 .028
Given that capital conditions remain equal, it does not matter for us if we .548 -.132
would substitute our current investors with others c
We find that our values and our investors‟ values are very similar c -.253 .864
Our investors‟ characteristics portray an image of us to others c .077 .811
Maintaining the relationship with our investors deserves our maximum effort c .450 .567
Reciprocity R_A: When things go wrong, both our investors and we respond .825 - .729
sympathetically to any problem we may have caused each other
R_B: The benefits that we as a company provide to and receive from our .794 -
investors even out over time
R_C: We aim to remain very flexible in meeting our investors‟ needs, even if .681 -
we will not receive contributions at present
When our investors make a valuable contribution to our company, it is .642 -
important that we show our appreciation right away c
If we do something extra for our investors, there is an expectation that they will .604 -
do something extra in return c

Notes:
a
All items, unless otherwise noted, use seven-point Likert scales, anchoring at 1=strongly

disagree and 7=strongly agree.

b
Cronbach‟s alpha for set of final items.
c
Eliminated items not appearing in the final questionnaire.

39
Table 3: Descriptives of relational dimension perceptions amongst IR professionals

Dimension Mean Std. Deviation Coefficient Minimum Maximum Mode

variation

Relationship orientation 5.21 .97 .186 3.0 7.0 5.7

Relationship evaluation 6.41 .56 .087 5.5 7.0 6.0 / 7.0
Trust 4.42 .98 .222 3.0 6.0 4.0
a
Commitment 5.70 1.28 .225 2.5 7.0 7.0
Reciprocity 4.84 .69 .142 4.0 6.0 4.7 / 5.0

Note:
a
Reversed score.

40
Table 4: Correlations among the relational dimensions a

Construct Relationship Relationship Trust Commitment b Reciprocity

orientation evaluation

Relationship orientation 1

Relationship evaluation -.055 1

(.402)
Trust .428** .279* 1
(.021) (.098)
Commitment b .359** .105 .375** 1
(.046) (.317) (.039)
Reciprocity .273 .219 .300* .149 1
(.104) (.158) (.082) (.248)

Notes:
a
We also conducted nonparametric alternative tests with Spearman‟s rho, leading to similar

results.
b
Reversed score.

** p < .05; * p < .10.

41
Table 5: Descriptives of IR outcomes in the financial marketplace

IR outcome measure Mean Std. Deviation Minimum Maximum

Analyst coverage a 22.40 4.57 15.89 30.89

b
Trading volume 1,749,631 2,315,682 214,097 11,955,025
c
Cost of equity capital (%) 5.00 2.49 0.47 9.39
d
Shareholder activism (#) 3.52 3.81 0 13

Notes:
a
Analyst coverage refers to the number of analyst estimations and recommendations

published per month from January until September 2009.

b
Trading volume or stock liquidity is the average daily trading volume of the stock between

January and September 2009.

c
Cost of equity capital as calculated per the dividend discount formula.
d
Shareholder activism refers to the number of incidents of shareholder activism per company

between January 2005 and September 2009.

42
Table 6: Correlations between IR management quality and IR outcomes a

Construct Analyst Trading volume Cost of equity Shareholder activism

coverage capital

IR management quality .149 .443** -.304* -.302*

(.253) (.019) (.096) (.086)

Notes:
a
We also conducted nonparametric alternative tests with Spearman‟s rho, leading to similar

results.

** p < .05; * p < .10.

43
Appendix: Test for significant differences between item correlations

Where
rxy = correlation coefficient between variables x and y
rxv = correlation coefficient between variables x and v
ryv = correlation coefficient between variables y and v

and

44
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