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The Value of Being Known

Written by Genevieve Norton

April 8, 2015

Research shows that a company with profile – through the media and other means – is more likely to be included in an investor’s portfolio, than a company without profile. 

Standard finance theory would have us believe that investors should behave rationally at all times, making their actions reasonably simple to predict.  This theory evolved based on two assumptions:

  • People make rational decisions.
  • People are unbiased in their predictions about the future.

From these basic assumptions, tools such as the Capital Asset Pricing Model were developed that allowed investors to measure performance of stocks as well as their risk, thus allowing them to assess whether the performance reward met the risk.

In the real world however, investors display a raft of irrational behaviours that fly in the face of rationalism.

Psychologists have known for decades that people do not always behave rationally and that standard finance theory on its own could not explain examples of seemingly irrational behaviour that caused pricing bubbles and other share trading anomalies. From this, the field of behavioural finance was born.

The field has found and proven several irrational behaviours. For example:

  • Males have been generally shown to display over-confidence, leading to excessive trading and risk taking;
  • Investors are generally predisposed to selling winning stocks too early and holding losers for too long; and
  • People will accept more risk for the same reward if they have recently experienced a gain or profit.

And there are many more, but from an investor relations and corporate communication perspective, perhaps the most interesting is the link between familiarity and a willingness to invest.

A 2007 University of Western Australia study analysed the likelihood of a stock being included in an investor’s portfolio using a sample of more than 1000 investors.

The study then considered a number of variables that could increase that likelihood, including the size of the company represented by the stock, recent and longer term performance of the stock, and the number of stories in the national media about that company in the previous month.

Despite the investors having a wealth of information available from which to draw on in choosing their portfolios, the likelihood of a company being included was predominantly influenced by the number of recent stories in the media relating to the company.

Simply put, the study found that the more news items there were about the stock, the more likely it was to be included in an investor’s portfolio. In fact, over 50 per cent of the variation in the likelihood of a stock being included in an investor’s portfolio could be explained by the availability of information.

Other studies have shown links between familiarity and investment levels, including that people are more likely to invest in the company they work for, despite traditional portfolio theory suggesting they should be more diversified than being invested in their employer.

This is not to say companies should necessarily try to get in the news at every opportunity. Media communication, like all company messaging, should be well planned and, where possible, strategic, to support the company’s overall business objectives.

All communication should support a firm’s over-arching corporate objectives, and should be delivered in a consistent and measured manner. A company’s 12-month communication timeline should give thought to filling gaps between the periods of “natural” news – such as results reporting seasons, AGM or other price sensitive events – with relevant, profile-building activities to keep that company “front of mind”. Such activities include proactive media engagement, conference attendance, comment pieces, site visits and/or broker/investor roadshows.

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