Investor Recognition Research Articles

Investor Communication and the Benefits of Cross-Listing

While studies have sought to explain the benefits of cross-listing, little attention has been paid to the role of communication between managers and investors during this process. In this paper, I investigate whether managers change communication policies around U.S. cross-listings. I document significant increases in communication when firms cross-list. I then test whether these investor communication practices around cross-listing are associated with capital market benefits. I find that cross-listed firms that communicate more with investors experience greater and longer lasting cross-listing benefits. Lastly, I explore two potential reasons that may lead managers to choose higher levels of communication: to support an increase in investor recognition and to facilitate monitoring. I find results consistent with communication increasing visibility and scrutiny, suggesting that communication functions as a supporting tool to achieve managers’ cross-listing goals.

Corporate governance analysts and firm value: Australian evidence

This paper replicates the UK findings in Lehmann (2019) and examines the value implication of corporate governance analysts in the Australian setting. Theoretically, corporate governance analysts create firm value via monitoring the management, enhancing information production and dissemination, and increasing investor recognition. However, we do not find this effect in Australia. Using an exogenous increase in coverage by corporate governance analysts, we find that unlike the case with UK firms, corporate governance analysts do not have any significant effect on firm value in Australia. Different sample compositions, macroeconomic conditions, and institutional settings might be the possible reasons for our insignificant results.

Investor interaction and price efficiency: Evidence from social media

Previous studies have paid scant attention to the different interaction modes of investors. This paper employs a network model to describe different types of investor interaction behaviors in financial social media and study the impact of such interaction behavior on the price efficiency of stocks. We find that single social media interaction is positively related to price efficiency, while null interaction is negatively related to price efficiency. However, binary interaction is an excessive interaction mode. It reduces the promotion effect of interaction on price efficiency. Furthermore, we provide an explanation of the interaction effect through private information and investor recognition.

Investor communication and the benefits of cross-listing

While studies have sought to explain the benefits of cross-listing, little attention has been paid to the role of communication between managers and investors during this process. In this paper, I investigate whether managers change communication policies around U.S. cross-listings. I document significant increases in communication when firms cross-list. I then test whether these investor communication practices around cross-listing are associated with capital market benefits. I find that cross-listed firms that communicate more with investors experience greater and longer lasting cross-listing benefits. Lastly, I explore two potential reasons that may lead managers to choose higher levels of communication: to support an increase in investor recognition and to facilitate monitoring. I find results consistent with communication increasing visibility and scrutiny, suggesting that communication functions as a supporting tool to achieve managers’ cross-listing goals.

Seeking Analyst Coverage: Steering User-Generated Content Using Monetary Incentives

Against the backdrop of the recent decline of professional analyst (PA) stock coverage, we study whether research support by non-professional analysts (NPAs) can increase stock market liquidity. In particular, we employ an instrumental variables approach to estimate the causal impact of NPA coverage on the market liquidity of covered stocks. We find that firms that are covered by NPAs in a given quarter display substantially higher market liquidity (as measured by trading volume). To identify the mechanism underlying this relationship, we investigate which types of firms exhibit the highest liquidity increase from NPA coverage. We find that the impact of NPA coverage is stronger when there is no simultaneous PA coverage, as well as for smaller and growth stocks. These findings suggest that NPA coverage stimulates market liquidity by increasing investor recognition and reducing information asymmetry, where investor recognition seems to be the dominant channel.

Customer satisfaction and the cost of capital

Using a sample of U.S. firms from 1995 through 2015 and the customer satisfaction scores from the American Customer Satisfaction Index, we find strong evidence that firms with higher customer satisfaction scores enjoy lower cost of equity capital, even after controlling for other factors that determine the cost of equity. In addition, results from a propensity score matched sample analysis, a difference-in-differences analysis, and instrumental variable regressions suggest that our findings are robust to accounting for endogeneity. We also document that customer satisfaction is positively related to investor recognition and financial report quality. The effect of customer satisfaction on the cost of equity increases with the level of information asymmetry, consistent with customer satisfaction mitigating information asymmetry. Overall, our findings suggest that customer satisfaction lowers a firm’s risk and significantly attenuates its financing costs.

Parent-subsidiary dispersion and executive excess perks consumption

We investigate the impact of parent-subsidiary dispersion on the corporate executives' excess perks consumption using comprehensive data of 1784 Chinese listed firms over the 2003–2017 period (i.e., total firm-year observations of 24,976). We argue that firms with greater geographic and institutional environment dispersion are subject to an acute information asymmetry problem, which makes it difficult and costly for shareholders and the public to monitor managerial actions and hence, facilitates managers to consume perks excessively. Consistent with this assertion, we find a positive relationship between parent-subsidiary company dispersion and executives' excess perks consumption. These patterns are not likely to be driven by the firms' endogenous choice and remain robust to various proxies for parent-subsidiary dispersion and executives' excess perks consumption. In addition, our results also show that firms with a greater dispersion between parent and subsidiary companies have higher investor recognition. However, investor recognition does not appear to negatively impact the rate of executives' excess perks consumption, which may explain why executives' excess perks consumption is not mitigated in firms with greater parent-subsidiary dispersion.

How Do Equity Analysts Impact Takeovers?

Firms covered by more analysts are more likely to become takeover targets and more likely to enter deals in which their acquirers initiate private merger negotiations. Moreover, when equity analysts’ pre-acquisition price forecasts imply greater target undervaluation, target firms are more likely to initiate their own sale, takeover premiums are higher, those premiums tend to be revised upwards during private merger negotiations, and acquirer firms use less cash to structure the transaction. These results imply a material role for equity analysts during the M&A process: their coverage affects takeover probabilities while their price forecasts influence merger premiums and the merger consideration. Our findings support both investor recognition and information generation theories about the role of equity analysts in financial markets.

Are Geographical Dispersion and Institutional Dispersion Related to Accounting Misstatements?

We examine the relation between geographical and institutional dispersion and accounting misstatements in China. We hypothesize that geographical dispersion is positively associated with the likelihood of accounting misstatements in subsidiary firms because of increasing monitoring cost and find evidence consistent with this prediction. We also focus on institutional dispersion because institutional duality may affect an organization’s behavior, but do not find that institutional dispersion is associated with accounting misstatements in subsidiary firms. Next, we find that geographical dispersion and institutional dispersion are negatively associated with misstatements in parent firms’ financial statements, consistent with the investor recognition argument. Lastly, we find that the negative (positive) relation between dispersion and parent-level (subsidiary-level) misstatements is more pronounced for state-owned firms and for firms with a wider (narrower) control-ownership wedge.

Institutional ownership, investor recognition and stock performance around index rebalancing: Evidence from Indian market

This study examines the effect of institutional ownership and investors’ recognition on stock performance around index rebalancing in the Indian market. Studying two significant indices-Nifty 50 and Next Nifty 50 of the National Stock Exchange (NSE) of India from 2002 to 2016 around index rebalancing, we observe the increase (decrease) in institutional ownership for index addition (deletion) category stocks where they exhibit positive (negative) stock returns on an average. Also, we observe that the deletion category stocks suffer from investors’ loss of attention around index rebalancing. Further, we find that foreign institutional investors react to index rebalancing events relatively faster compared to mutual funds and banking institutions. Overall our results support index rebalancing as an information event for Indian markets, conveying positive information about addition stocks whereas negative stock price response for deletion stocks.

Web-based impression management? Salient features for CSR disclosure prominence

PurposeThe purpose of this paper is to identify the web-based features of corporate social responsibility (CSR) disclosure that play a role in making CSR information prominent to investors and give the information better recognition for investment decisions.Design/methodology/approachThe authors posit a positive association between the company’s capital market performance and the web-based features used for CSR disclosure by the company. The authors argue that the more effective the feature is in enhancing the prominence of CSR information, the higher is the share turnover and market value of shares of a company, and the lower is its share prices’ bid-ask spread. Five specific web-based features, namely, the location, accessibility, medium, variety and extent of disclosure are identified as features used for web-based CSR disclosure. The research framework is drawn from Brennan and Merkl–Davies’ (2013) impression management strategies and Merton’s (1987) “investor recognition hypothesis”.FindingsThe findings show that visual and structural emphases of CSR information via specific web-based features enhance information prominence and could favourably influence investors’ impression towards the company. Investors are likely to make investment decisions in favour of the company, resulting in a higher share turnover along with increased market value of the shares of the company and lower bid-ask spread of its share prices.Research limitations/implicationsThe paper highlights the significance of utilisation of web-based features in enhancing CSR information prominence for impression management purposes.Practical implicationsThe findings have the potential to benefit preparers, users and policymakers by enhancing their knowledge and understanding of the utilisation of web-based CSR disclosure features. Specifically, preparers will be more aware of web-based feature(s) that could be useful in projecting CSR-related information to their stakeholders.Social implicationsThe study will help enhance the dissemination of web-based CSR information.Originality/valueThe study adds to the literature on web-based CSR disclosure, by developing a structured approach to examine the effectiveness of web-based features for investors’ impression management.

The Price of Carbon Risk: Evidence from the Kyoto Protocol Ratification

This paper examines the impact of carbon risk on firms’ financing costs. We exploit the Kyoto Protocol ratification (hereafter KPR) committed by the Australian government in December 2007 as an exogenous increase in carbon risk. We find that, in the post-KPR period, firms with high carbon emissions (carbon emitters) experience a substantial increase in the costs of debt and equity relative to those firms with a lower carbon footprint. We further identify higher cash flow risk and lower investor recognition as the two channels through which carbon risk affects the financing costs. Moreover, after the KPR, carbon emitters are less likely to be financed by major banks and more likely to borrow from new lenders. When conducting seasoned equity offerings, carbon emitters are more willing to use underwriting services rather than rights offerings. Our findings suggest that capital providers incorporate firms’ exposure to carbon risk into their decisions and charge them a corresponding risk premium.

Social media effect, investor recognition and the cross-section of stock returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

Investor recognition, liquidity, and post-issue performance following rights offerings: Evidence from a frontier market

This paper examines changes in investor recognition and liquidity around rights offerings in a frontier market, viz., Sri Lanka. We find that offer characteristics such as issue proceeds and offer price discounts improve investor recognition. We find that larger offer price discounts and offer proceeds are associated with increases in investor recognition. Further, we find that announcements of rights issues reduce information asymmetry and as a result, liquidity improves in the post rights issue announcement period. In addition, we find a strong positive association between liquidity improvements and increases in investor recognition. Finally, we find that greater investor recognition is negatively associated with contemporaneous and post- issue abnormal stock returns, whereas increases in liquidity are positively associated with post-issue abnormal returns. Overall, we show that rights issues in a frontier market affect both investor recognition and liquidity.

Do Corporate Governance Analysts Matter? Evidence from the Expansion of Governance Analyst Coverage

ABSTRACTThis paper examines the economic consequences of the initiation of governance analyst coverage. Governance analysts process, enhance, and disseminate governance‐related information to capital market participants via, for example, governance reports and ratings. Using an exogenous shock in the United Kingdom, I find that an increase in governance analyst coverage results in increased governance quality, improved liquidity, increased financial analyst following, and improved investor breadth. These findings are consistent with governance analysts creating value for firms via monitoring, information dissemination/production, and investor recognition.

Social Media Effect, Investor Recognition and the Cross-Section of Stock Returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

The effects of regional cross listing on firm value and financial performance: drawing lessons for Lesotho

This research determines the effects of regional cross listing on firm value and financial performance and draws policy lessons for Lesotho. Using event study methodology, financial ratio analysis and a regional case study of two Sub-Saharan African firms that cross listed on the Johannesburg Stock Exchange in 2015 and 2016, the results of the study reveal that cross listing leads to increased firm liquidity coupled with positive and statistically significant abnormal returns. These findings confirm the legal bonding theory, the signalling theory, the investor recognition theory and the liquidity theory. It is recommended that the empirical findings of this study be used by authorities to draw locally incorporated firms' attention to the potential benefits of cross listing. This should be done in conjunction with initiatives that identify and unlock any bottlenecks that act as deterrents for company listing on the Maseru Securities Market.

The impact of religious certification on market segmentation and investor recognition

We compare the performance of Islamic and conventional stock returns in Saudi Arabia in order to determine whether religious preferences can create segmented financial markets consistent with investor recognition effects. We sample the daily stock returns of all Saudi firms from September 2002 through 2015 and find Islamic stocks (recognized) have a broader investor base, are more liquid (Amihud, 2002) and exhibit lower idiosyncratic risk (Ang et al., 2006) than conventional (neglected) stocks, which support the segmentation of Islamic and conventional stocks in the Saudi market. Furthermore, the segmentation of Islamic stocks from less-recognized conventional stocks significantly affects how information is incorporated into asset prices in predominantly Islamic markets. Islamic stocks exhibit greater integration with local and global macroeconomic factors (Pukthuanthong and Roll, 2009) and have higher systematic turnover (Loughran and Schultz, 2005) than conventional stocks. Our results provide new evidence on the impact of the corporate decision to comply with religious and social norms on asset pricing in emerging markets, the evolving Islamic financial markets, and markets where other significant implicit, or cultural, barriers may exist.

Corporate Social Responsibility and Firm Value: The Mediating Role of Investor Recognition

ABSTRACTThe study is to examine the mediating effect of investor recognition on the relationship between CSR and firm value. Data on companies listed on the Taiwan Stock Exchange between 2010 and 2013 were taken from Taiwan Economic Journal Data Bank (TEJ) and the CSR database developed by Chen and Hung (2013). Using partial least square analysis, we found that (i) significant positive effects between CSR and investor recognition, investor recognition and firm value, and finally CSR and firm value; (ii) when investor recognition is treated as a mediator, there is a mediating effect; and (iii) this mediating effect is a full mediation. The study helps to link CSR to firm value and reveals the crucial role of investor recognition as a mediator, thereby clarifying the indistinct relationship between CSR and firm value in existing literature.

Does Analyst Coverage Enhance Firms’ Corporate Social Performance? Evidence from Korea

This paper examines the association between analyst coverage and corporate social performance, using comprehensive donation expense data from Korea. Following analyst “investor recognition view”, analyst coverage might be the one of the key determinants of firms’ CSP to higher firms’ reputational capital. The empirical results suggest that analyst coverage is, on average, positively associated with corporate social performance (CSP) and that this positive association is more pronounced in a non-chaebol (i.e., non-large industrial conglomerate) sample. Further this result is consistent with a battery of robustness tests, such as alternative use of CSP, interaction analysis, two-stage least square regression (2SLS) and alternative use of analyst coverage. This paper goes beyond prior literature using audited donation expense and chaebol data, this paper shows that analysts could partially provide information to enhance firms’ reputations and thus their reputational capital by attending to CSP which would be regarded as pertinent firms’ sustainability. Furthermore, this tendency is more pronounced in relatively lower-reputation firms, such as non-chaebol ones in Korea. Mainstream literature on CSR is conducted within the context of developed countries, such as the U.S. or the U.K., leaving the empirical question as to whether such results apply to other developing countries such as Korea. So, using unique corporate giving data, this paper investigate analyst coverage might enhance firms’ CSP even in a relatively poor information environment such as Korea.