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
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."