Investor Relations and Regulation FD
Investor Relations and Regulation FD
Investor Relations and Regulation FD
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Building <strong>and</strong> maintaining close relationships with analysts <strong>and</strong> institutional shareholders<br />
is a major focus of IR – 83% of an IR department’s time is devoted to institutional investors <strong>and</strong><br />
analysts, as opposed to individual shareholders (NIRI, 2004). Yet this intimate relationship <strong>and</strong><br />
preferential treatment troubled the SEC. In 2000, the SEC was increasingly concerned that firms<br />
were selectively disclosing material nonpublic information to securities analysts <strong>and</strong>/or selected<br />
institutional investors. To explicitly outlaw this practice <strong>and</strong> create a “level playing field”, the<br />
SEC implemented Reg <strong>FD</strong> in October, 2000 (Reg <strong>FD</strong>, 2000).<br />
This regulation takes aim at the heart of the IR process – the relationship <strong>and</strong><br />
communication with analysts <strong>and</strong> institutional investors. IR professionals cite increases in the<br />
number of analysts, institutional investors (particularly longer term), <strong>and</strong> disclosure as<br />
measureable objectives of a successful IR program (Farragher et al., 1994; Mahoney <strong>and</strong> Lewis,<br />
2004; Bushee <strong>and</strong> Miller, 2010). IR professionals build relationships with analysts <strong>and</strong><br />
institutional investors through organizing webcasts, conference calls, one-on-one meetings, <strong>and</strong><br />
presentations (Francis et al., 1997; Bushee et al., 2011). Virtually every surveyed company<br />
(99.5%) conducts meetings with analysts <strong>and</strong> institutional investors: 98% host one-on-one<br />
meetings, 95% hold conference calls, 92% have group meetings initiated by others, <strong>and</strong> 70%<br />
have on-site company/facility meetings or tours (NIRI, 2004). The selectivity of these meetings<br />
creates a high potential for nonpublic disclosures during conversations <strong>and</strong> when answering<br />
questions.<br />
In particular, one high risk IR activity involves earnings guidance, including activities<br />
such as individually reviewing analysts’ earnings models <strong>and</strong> draft reports. In a NIRI survey,<br />
finance, communication, marketing <strong>and</strong> securities law compliance to enable the most effective two-way<br />
communication between a company, the financial community, <strong>and</strong> other constituencies, which ultimately contributes<br />
to a company's securities achieving fair valuation.” An exception is Bushee <strong>and</strong> Miller (2010) which investigates the<br />
role of IR consultants hired by small firms. See footnote 1.<br />
5