American Univesity of Beirut

Prestigious publication for OSB professors in the top-ranked Review of Accounting Studies

​Professor in Finance Dr. Salim Chahine and Assistant Professor in Accounting Dr. Mohamad Mazboudi at the Suliman S. Olayan School of Business (OSB), American University of Beirut (AUB), were published in the renowned Review of Accounting Studies. Their research (co-authored with two other researchers, Dr. Gonul Colak and Dr. Iftekhar Hasan) examines the role of investor relations (IR) consultants during initial public offerings (IPOs).

In recent years, many private firms have hired IR consultants to improve their visibility, and ensure the success of their IPOs, with nearly half of U.S. IPOs issued in 2016 involving IR consultants. The work fills a gap in literature by investigating the benefits and costs of using IR consultants around an IPO, and by analyzing how IR activities influence IPO mispricing that arise from agency problems.

IR consultants engage in different public relations strategies to help firms manage relations with the financial media, arrange direct communications between firm managers, target institutional investors, and increase the quality and timeliness of corporate disclosures. They write and distribute press releases, speeches, and pitches that are shared with journalists, and organize special events for the media. IR consultants also analyze their clients, find optimistic messages for their respective firms, and translate them into positive media stories. 

Smaller and weaker IPO firms, typically characterized by asymmetric information and agency issues, are more likely to hire IR consultants, prior to the IPO date. IR consultants help create positive news coverage before an IPO event, reflected by a more optimistic tone in published media. Their presence is associated with higher underpricing at the IPO date, but with lower long-run returns. 

IR-backed IPOs also exhibit disproportionately higher insider-related agency problems, as IR-induced higher underpricing tends to occur primarily in IPOs, where underwriter and venture capitalist agency conflicts are more severe. These findings suggest that the IR programs of IPO firms occur mostly in the short-term, and tend to facilitate ulterior motives of some insiders (underwriters and venture capitalists) targeting higher first-day returns.

IR-backed IPOs have higher IPO price revisions, higher first-day stock returns, and relatively better post-IPO market liquidity. Analysts covering the IR-backed IPOs seem to have more optimistic expectations about these firms' fundamentals at the time of the IPO, but the actual post-IPO performance of these firms frequently involves negative earnings. Thus, this positive effect is temporary; it reverses within a few years. Consequently, investors who react favorably to event-oriented, short-term IR strategies (primarily individual investors and institutions that are small and unsophisticated) bear the costs of IR-based hyping strategies. 

"An IPO event is an interesting setting to examine IR activities. Most private firms going public are small, risky, and unknown," say researchers, explaining further, "there is little academic research which examines IR activities in the primary markets."

"Given the limited economies of scale from developing an internal IR division within a young and relatively small firm," write researchers, "IR consultants can help issuing firms shape their communication plans toward investors, analysts, and the media." 

"Using a sample of 769 IPOs from 2006 to 2016," state the authors, "we find that IR consultants seem to have short-term roles, and focus primarily on the successful completion of the event."

Additionally, the authors mention that "IR consultants are associated with a more optimistic tone in print media coverage, and this optimistic tone helps create short-term improvements in IPO performance around the offering date."​

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