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CCIJ
17,2
138
Received 19 January 2011
Revised 23 June 2011
16 September 2011
Accepted 22 November 2011
Corporate Communications: An
International Journal
Vol. 17 No. 2, 2012
pp. 138-155
q Emerald Group Publishing Limited
1356-3289
DOI 10.1108/13563281211220265
Investor relations beyond
financials
Non-financial factors and capital market
image building
Christian Hoffmann and Christian Fieseler
Institute for Media and Communications Management,
University of St Gallen, St Gallen, Switzerland
Abstract
Purpose – In this paper, the authors aim to identify a range of non-financial factors that play a role in
the formation of a company’s image, and ultimately its valuation, on capital markets. By identifying
and highlighting their relative importance to the perceptions of equity analysts, the authors seek to
show that investor relations are best understood as a strategic communication function rather than a
mere purveyor of pure financials.
Design/methodology/approach – The findings are based on a two-tiered approach, relying on
qualitative interview data collected among 42 equity analysts and a subsequent exploratory factor
analysis performed on data obtained from a survey among 134 buy- and sell-side analysts.
Findings – The authors argue that equity analysts consider the following eight categories of
non-financial information when forming an impression of a company: the stakeholder relations of an
organization, its corporate governance, its corporate social responsibility, its reputation and brand, the
quality of its management, and its strategic consistency. One of the most important factors, however,
is the quality of a company’s communication, which underscores the strategic role that the investor
relations function should play in fostering positive capital market relations.
Research limitations/implications – Being explorative in nature, the categories and scales
proposed need further validation. Furthermore, in future research, it would be worthwhile to explore
not only the role of non-financials in image formation but also the interplay between financials and
non-financials in image formation.
Practical implications – Investor relations professionals should consider the factors presented in
this study in their work in order to ensure that they cater to the actual information needs of capital
market participants. The consideration of non-financial factors enhances the quality of financial
communications. It also enriches the understanding of the strategic communication tasks of the
investor relations department.
Originality/value – This paper describes an empirical analysis of the management of corporate
relationships with financial audiences, a stakeholder group increasingly focused on by
communications research. It represents a contribution to the further establishment of investor
relations as a strategic communication function.
Keywords Investor relations, Non-financials, Image, Equity analysts, Reports, Corporate image,
Corporate communications
Paper type Research paper
1. Introduction Investor
It’s all about bucks, kid. The rest is conversation (Gordon Gekko, Wall Street, 1987). relations beyond
Capital market participants like to perceive themselves as rational beings, driven
financials
purely by hard and reliable financial data. It may come as a surprise, therefore, that a
wide range of studies point to a significant impact of non-financial factors on a
company’s market performance. Research in the area of behavioral finance has 139
outlined the influence of cultural and psychological factors on financial
decision-making processes (Shiller, 2000). According to Baruch Lev (2001), financial
statements are becoming increasingly incapable of capturing the true market value of
major corporations. Intellectual capital has been described as the single most important
factor in wealth creation (Kiernan, 2005). A survey of analysts and investors conducted
by the Ernst and Young Center for Business Innovation (1997) confirmed that financial
metrics are usually a lagging indicator of a company’s performance, whereas
non-financials actually provide information about a company’s future success.
Capital market participants, in fact, regard a wide range of non-financial factors
when analyzing a company (Gabbioneta et al., 2007). For this reason, organizations
wanting to bolster their market performance by winning over the financial community
need to regard their financial communication, or investor relations (IR) function, as
more than just a tool for financial reporting. The practice of investor relations,
according to the US National Investor Relations Institute (NIRI), has to be understood
as a:
[. . .] strategic management responsibility that integrates finance, communication, marketing
and securities law compliance to enable the most effective two-way communication between a
company, the financial community, and other constituencies, which ultimately contributes to
a company’s securities achieving fair valuation (adopted by the NIRI Board of Directors,
March 2003).
In other words, the investor relations function provides the financial community with
crucial input on the state, the success and the strategic development of a business,
which goes beyond purely financial reporting. However, to better understand the role
of investor relations in shaping a company’s perception or image on the capital market
– in other words, IR’s image-shaping function – practitioners need to know which
factors actually reach and influence their target audience.
In this study, we employed a grounded theory approach in an explorative survey
among professional capital market participants to identify those non-financial items
that play a central role in corporate image-building on capital markets. By
non-financials, we refer to data beyond core financial reporting (e.g. balance sheet and
income statement data). In a second step, we conducted a quantitative survey among
equity analysts and used exploratory factor analysis to group the weighted items into
non-financial factors that can be understood as relevant elements of investor relations
as an image-building function – factors that go beyond the mere reporting of
financials. Based on this analysis, we discuss the implications of our findings for
investor relations in the final section of this article.
CCIJ 2. Literature review
17,2 2.1 Investor relations as a reporting function
The fair disclosure of current business data has traditionally been regarded as a core
task of the investor relations function (Skinner, 1994; Healy et al., 1999; Bushee and
Noe, 2000; Bushee et al., 2003; Hutton et al., 2003). In fact, research on investor
relations has largely been focused on three aspects: disclosure (Bushee and Noe, 2000;
140 Bushee et al., 2003; Healy and Hutton, 1999; Hutton et al., 2003; Skinner, 1994),
shareholder structure (Allen, 2002; Brennan and Tamarowski, 2000), and visibility
(Francis et al., 1997; Grullon et al., 2004; Huberman, 2001; Lehavy and Sloan, 2005).
Studies on companies’ levels of disclosure stress the fact that shareholders do not
possess ongoing insight into the business and financial development of a company.
The investor relations function is thus given the task of reducing information
asymmetries between business insiders, such as management, and the financial
community, which represents those outside the company (Botosan, 1997; Botosan and
Plumlee, 2002; Merton, 1987). Healy and Hutton (1999) have partly attributed
significant excess returns among listed companies to improvements in their disclosure
levels. Hong and Huang (2003) have shown that investor relations activities often aim
at ensuring sufficient liquidity. Finally, Lang and Lundholm (1996) have found a
positive relationship between voluntary disclosure and high analyst coverage, better
accuracy and lower variance in analyst forecasts. Francis et al. (1997) confirm a
significant correlation between the quality or intensity of investor relations and analyst
coverage. Bushee and Miller (2007) have found that the engagement of IR consultants
for the purpose of improving IR strategies lead to an increase in press and analyst
coverage, trading frequency and even market value.
Many studies assume that the investor relations function is aimed at assuring an
attractive shareholder structure and thus facilitating access to capital (Grant and
Rogers, 1999; Arbel, 1985). A range of studies thereby focus on company attributes that
attract institutional investors (O’Brien and Bhushan, 1990; Del Guercio, 1996; Gompers
and Metrick, 2001). It has been shown that such investors prefer large companies listed
on the major stock exchanges, that is, companies that are more visible than others.
National or regional closeness also positively impacts perceptions of a company
(Huberman, 2001).
Studies aimed at the role of investor relations in shaping the shareholder structure
already go beyond an understanding of this function as a mere reporting or disclosure
tool. Corporate governance research has significantly contributed to a deeper
understanding of the relationship between a company’s management and its
shareholders and thereby the role of investor relations. It has been shown that a core
feature of public companies is the separation of ownership and control, that is, the
principal-agent relationship between shareholders and management. Shareholders,
especially those of large public companies, do not directly control strategic or
operational management decisions (Berle and Means, 1932; Eisenhardt, 1989; Fama,
1980; Jensen and Meckling, 1976). It has been argued that the alignment of
management decisions with shareholders’ interests lies at the heart of corporate
governance ( Jensen and Meckling, 1976; Fama, 1980). Because management and
shareholder interests may well differ or even clash, the investor relations function will
repeatedly find itself engaged in balance-of-power politics. In fact, Rao and Sivakumar
(1999) attribute the rise of the investor relations function to management’s need to
effectively manage shareholder relations and protect itself from critical demands or Investor
even attacks from unruly shareholders. relations beyond
2.2 Investor relations as an image-building function financials
Understanding investor relations as a function charged with the management of
crucial stakeholder relations – those between a company and capital market
participants – allows for a further analysis of IR’s strategic role and tasks (Petersen 141
and Martin, 1996; Marston and Straker, 2001; Laskin, 2009). Tuominen (1997) and
Hoffmann et al. (2011) describe this role in terms of fostering dependable and beneficial
relationships by increasing trust, cooperation and commitment. As the central link
between a company and the financial community, investor relations is tasked with a
whole range of strategic goals, such as creating shareholder value, lowering capital
costs, and ensuring access to capital (Chung and Jo, 1996; Kuperman et al., 2003; Moyer
et al., 1989; Lang and Lundholm, 1996; Luez and Verrecchia, 2000; Statman, 1999). In
other words: investor relations strive to ensure the acceptance and cooperation of
relevant capital market participants through communication.
Kuperman (2003) has described this role as a sensegiving function: the investor
relations department provides the financial community with crucial input, allowing
them to develop a more realistic understanding of the company. The evaluation of a
company can accordingly be understood as an interpretative exercise – in a process of
sensemaking, new data are collected and incorporated into existing cognitive
structures or schemata (Starbuck and Milliken, 1988; Fiske and Taylor, 1991;
Weick, 1995; Lord and Foti, 1986; Nisbet and Ross, 1980; Zuckerman, 1999;
Thomas et al., 1993). One equity analyst participating in this study described his
approach fittingly:
I think in my view, and in any half-experienced analyst’s view, the painting at the end of the
day is made of all the soft bits that go into that painting. It is made up of the inspiration of the
artist, and it is made up of the colors that are available to him and the experiences that he has
had.
According to Grunig (1993), such schemata can be understood as a different concept for
what is commonly discussed in public relations theory as “image”. Of course, the data
disclosed by a company represent no more than one aspect of the complex image
created by the financial community. An investor’s understanding of a company is also
formed by speaking with the company’s management, by reading or consuming the
available media information and reports, by comparing companies to members of peer
groups, and even through the personal experience of buying and consuming
a company’s products and services (Fombrun, 1996; Deephouse, 1997;
Gabbioneta et al., 2007). Nevertheless, by providing the financial community with
regular input into their sensemaking efforts, investor relations, at its core, is engaged in
an image-building process.
Investor relations professionals strive to increase a company’s visibility in capital
markets to enhance its impact on investors’ perceptions and opinions (Clarke and
Murray, 2000; Mazzola et al., 2006). Dolphin (2004) stresses the need of listed companies
to win the approval of financial stakeholders. In this respect, investor relations is
sometimes referred to as a “strategic corporate marketing activity” (Rao and
Sivakumar, 1999). IR departments try to identify and attract investors through
targeted relationship management activities (Tuominen, 1997; Allen, 2002; Hoffmann
CCIJ et al., 2011). Communication scholars have also pointed out similarities between IR and
17,2 public relations, given that both functions are aimed at creating a positive (capital
market) reputation (Cutlip et al., 1999; Hong and Ki, 2007; Laskin, 2009). Such favorable
financial stakeholder perceptions are held to enhance business and stock
price performance and investor loyalty (Deephouse, 1997; Dolphin, 2004;
Gabbioneta et al., 2007; Helm, 2007).
142 To succeed in sensegiving and achieve any lasting impression on their target
groups’ image of a company, though, investor relations managers need to understand
their information needs based on existing schemata (Kuperman, 2003). By identifying
non-financial corporate factors that enter the financial community’s sensemaking
efforts besides and beyond companies’ financial reporting, we aim to deepen the
understanding of IR’s role as an image-building function.

3. Methodology
3.1 Qualitative analysis
The lack of previous empirical research on how equity analysts perceive non-financial
information encouraged us to select an interpretative paradigm. First, we applied a
qualitative, grounded theory approach in order to generate theoretical insights, as
summarized by Strauss and Corbin (1998). More specifically, we wanted to explore and
identify the widest possible range of non-financial items considered by equity analysts
when analyzing a company, before categorizing them in a subsequent second step. To
this end, we interviewed professional equity analysts who cover companies listed on
the Frankfurt Stock Exchange. In all, 42 semi-structured in-depth expert interviews
were conducted with representatives of the sell and buy sides between May and
October 2006, based on a theoretical sampling approach. In other words, we began by
interviewing a group of analysts and gradually expanded the sample by including
analysts employed by other institutions, of other nationalities and covering other
segments and industries until a level of theoretical saturation was reached, i.e. the
items deduced from the interviews became redundant (Strauss and Corbin, 1998). The
semi-structured telephone interviews featured open questions regarding capital market
participants’ decision-making processes: their approach to a corporate analysis,
sources of information, the relevance and character of non-financial factors entering
their considerations. Transcripts from the interviews were subsequently examined for
comments that could be related to perceptions and considerations of non-financial
items. The items identified in this first step formed the basis of the quantitative
questionnaire used in our second research step.

3.2 Quantitative analysis

In second phase of our analysis, we used exploratory factor analysis to group the
identified items into distinct categories. Employing an online survey, we asked equity
analysts to rate the previously identified list of non-financial items according to the
importance they play for their work. For each item, the participants were asked to rate
their disagreement or agreement to the question “When I consider or analyze a
company, the following item is very important to my impression of the company?” on a
five-point Likert scale (from “1 ¼ strongly disagree” to “5 ¼ strongly agree”). An
initial pre-test was conducted among five experts in the field of equity analysis and
finance. They were requested to assess the relevance and validity of each item. Five
items were adjusted in their wording in order to ensure general understandability, none Investor
were added or removed. relations beyond
The actual survey was undertaken between February and July of 2007, based on a
database of equity analysts and investors active at the Frankfurt Stock Exchange, and financials
that was independent from the one used for the qualitative interviews. From 968
persons contacted via e-mail, 134 persons (13.8 per cent) filled out the questionnaire
completely. Given the difficulties of polling elite participants such as capital market 143
participants, the number of responses was deemed satisfactory (Davis, 2005). The
sample consists of 47 per cent participants from the sell side (63 completed
questionnaires from equity analysts) and 53 per cent participants from the buy side (71
completed questionnaires from institutional investors).
The latent causes behind the 47 non-financial items derived from the qualitative
interviews were elicited by conducting factor analysis. We checked for sampling
adequacy to ensure that factor analysis was suitable by computing the
Kaiser-Meyer-Olkin measure, which, with a value of 0.714, can be considered
adequate. We continued with exploratory factor analysis by using principal
component analysis with Varimax rotation and Kaiser Normalization. The final
factor analysis displayed in Table I includes 26 variables that load on nine factors. The
nine computed factors explain 69.3 per cent of the total variance.
The first factor combines a number of stakeholder-related corporate information
that impact corporate perception by equity analysts. The next two factors describe the
importance of communication and transparency. The fourth factor includes a number
of non-financial information that is of interest from the perspective of sustainability
and regulation issues. Factors 5 and 6 lay out the importance of good brand
stewardship and reputation management. Finally, the last two factors describe the
impact of management and its strategic vision on the perceptions of analysts and
investors. All of the factors except for the seventh, commitment to shareholder value,
are reliable with an a-value exceeding 0.6. Said factor commitment to shareholder
value was accordingly omitted from the results. All in all, a is significant, with a value
of 0.85 for all factors. The factors and non-financial information that resulted from the
factor analysis were subsequently labeled and are depicted in Table II; they will be
explained in detail in the following section.

4. Empirical results
On the following pages, we will describe the non-financial factors identified in the
factor analysis as driving the images held by equity analysts, including their
underlying corporate characteristics. The description of these factors is based on the
understanding of their elements gained through the qualitative interviews conducted
in the first phase of this project. Where possible, analogies with current research are
outlined.

4.1 Stakeholder Relations

The first factor is composed of the following corporate characteristics:
.
customer service (I1);
.
employee satisfaction (I2);
.
customer satisfaction (I3);
 17,2
CCIJ

144

analysis
Table I.
Principal component
Rotated component matrix
Component
1 2 3 4 5 6 7 8 9

I1 Customer service 0.787 0.185 0.003 20.013 0.230 2 0.002 2 0.006 2 0.031 2 0.152
I2 Employee satisfaction 0.766 20.078 20.077 0.039 20.012 0.094 0.131 0.018 2 0.008
I3 Customer satisfaction 0.766 20.107 0.039 20.073 0.175 2 0.193 0.090 2 0.062 0.005
I4 Employee communication 0.683 0.133 0.092 0.181 20.002 0.173 2 0.075 0.075 0.171
I5 Employee turnover 0.657 0.090 0.251 0.156 0.029 0.171 2 0.249 0.132 0.243
I6 Availability of IR staff 20.127 0.869 0.061 0.068 0.100 2 0.019 0.194 0.083 0.052
I7 Competence of IR staff 0.025 0.842 20.018 0.052 20.119 0.061 0.095 0.246 0.124
I8 Proactive agenda setting 0.140 0.696 0.147 0.142 20.001 0.158 0.037 2 0.071 0.137
I9 Transparency 0.096 20.030 0.752 0.193 20.009 0.189 2 0.120 0.023 0.009
I10 Disclosure 0.223 0.176 0.701 0.217 20.068 0.081 0.071 0.139 0.004
I11 Board structure 0.107 0.000 0.672 0.027 0.226 2 0.095 0.075 2 0.244 0.122
I12 No insider trading 20.069 0.098 0.625 20.072 0.139 0.175 0.195 0.233 0.053
I13 Susceptibility to regulation 0.046 0.046 0.080 0.806 0.198 2 0.058 0.030 0.120 2 0.091
I14 Lobbying 20.010 0.205 0.062 0.793 20.016 0.195 0.199 2 0.009 0.134
I15 Sensitivity of operations 0.127 0.030 0.176 0.670 0.021 0.229 2 0.026 0.141 0.022
I16 Brand strength 0.092 20.061 0.085 0.040 0.831 0.279 2 0.212 2 0.016 0.033
I17 Branding acumen 0.247 0.090 0.053 0.180 0.686 0.012 0.143 2 0.094 0.111
I18 Innovation 0.269 20.084 0.179 0.019 0.614 2 0.022 0.449 0.194 2 0.069
I19 Media coverage 0.106 0.022 0.103 0.192 0.110 0.802 0.081 2 0.054 0.136
I20 Public reputation 0.122 0.186 0.189 0.113 0.105 0.800 0.128 2 0.009 0.021
(Cost efficiency) 20.048 0.153 0.128 0.165 0.127 2 0.024 0.774 2 0.087 0.103
(Communication skills) 0.044 0.177 20.023 0.015 20.085 0.263 0.722 0.110 0.090
I21 Strategy 0.012 0.027 0.039 0.068 0.089 0.016 0.039 0.825 0.066
I22 Consistency 0.111 0.182 0.057 0.161 20.120 2 0.067 2 0.006 0.783 0.037
I23 Experience 0.058 0.192 20.007 0.119 0.064 0.126 2 0.041 2 0.006 0.838
I24 Track record 0.086 0.091 0.161 20.102 0.032 0.032 0.267 0.135 0.783
 Investor
Non-financial factors Mean SD
relations beyond
1. Stakeholder relations (a ¼ 0.824) 3.69 0.89 financials
I1 Customer service 3.94 0.878
I2 Employee satisfaction 3.72 0.848
I3 Customer satisfaction 4.04 0.840
I4 Employee communication 3.22 0.966 145
I5 Employee turnover 3.52 0.921
2. Quality of communication (a ¼ 0.787) 4.27 0.82
I6 Availability and openness of IR staff 4.29 0.856
I7 Competence and experience of IR staff 4.22 0.856
I8 Proactive agenda setting 4.29 0.747
3. Corporate governance (a ¼ 0.691) 3.68 0.86
I9 Transparency of appointment policies 3.35 0.869
I10 Disclosure of compensation policy 3.60 0.846
I11 Board structure 3.70 0.868
I12 Transparency regarding insider trading 4.06 0.861
4. CSR (a ¼ 0.715) 3.53 0.99
I13 Susceptibility to regulation 3.87 0.884
I14 Lobbying 3.41 0.990
I15 Environmental and social sensitivity of operations 3.31 0.986
5. Branding (a ¼ 0.677) 3.55 0.82
I16 Brand strength 3.75 0.815
I17 Branding acumen 3.12 0.727
I18 Innovation and technology leadership 3.77 0.930
6. Reputation (a ¼ 0.766) 3.16 0.93
I19 Media coverage 2.95 0.897
I20 Public reputation 3.36 0.966
7. Consistency (a ¼ 0.604) 4.36 0.70
I21 Execution of strategic plans 4.55 0.566
I22 Consistency of strategic plans 4.17 0.840
8. Quality of management (a ¼ 0.615) 3.55 0.87 Table II.
I23 Company and industry experience 3.85 0.891 Identified factors and
I24 Track record 3.25 0.846 items

.
employee communication (I4);
.
employee turnover (I5); and
.
staff recruiting (I6).

With an average of 3.78 (SD ¼ 0:87), this factor is rated fourth in absolute terms
compared to the other non-financial factors. In their assessment, equity analysts seem
to include the fact that corporate relations to customers and employees are vitally
important for the financial success and the future development of the company; we
therefore named this factor “Stakeholder relations”. This is the only factor that features
a significant difference in evaluation (tð1Þ ¼ 4:81, p ¼ 0:03) between sell-side
(M ¼ 3:62, SD ¼ 0:83) and buy-side participants (M ¼ 3:90, SD ¼ 0:90).
CCIJ Equity analysts are interested in indicators of successful customer relationships.
17,2 The characteristics “Customer satisfaction” (M ¼ 4:04, SD ¼ 0:84) as well as
“Customer service” (M ¼ 3:94, SD ¼ 0:88) are significant drivers of perceptions held
by capital market participants. In addition to customers, employees are also recognized
as important stakeholders: “Employee satisfaction” (M ¼ 3:72, SD ¼ 0:85) and
“Employee communication” (M ¼ 3:22, SD ¼ 0:97) indicate a company’s ability to
146 create a beneficial working atmosphere. A company’s effectiveness in “Staff recruiting”
(M ¼ 4:25, SD ¼ 0:83) is a matter of particular interest. “Employee turnover”
(M ¼ 3:52, SD ¼ 0:92), in turn, is of interest, too, but was perceived by participants as
a negative indicator or warning sign: frequent employee layoffs are costly and point to
problems within the company’s operations. Overall, this factor appears to indicate a
congruence of the perspective of equity analysts with established theories of
stakeholder management. These theories stress the importance of positive stakeholder
relations for the sustainable success of a company (Freeman, 1984; Donaldson and
Preston, 1995; Mitchell et al., 1997; Hillman and Keim, 2001).

4.2 Quality of communication

The second factor consists of the characteristics “Availability and openness of investor
relations staff” (I7), “Competence and experience of investor relations staff” (I8) and
“Proactive agenda setting” (I9). With an average of 4.27 (SD ¼ 0:82), this factor is rated
second highest in terms of absolute means. Participants pointed out that the IR
department functions as an access point for relevant corporate data as well as
management. Therefore, when a firm’s investor relations is more competent,
transparent and reliable, it is more likely that capital market participants have a
chance to develop an accurate understanding of the company’s situation and prospects.
Equity analysts expect their IR contacts to possess a profound knowledge and
understanding of the needs of the capital market (M ¼ 4:22, SD ¼ 0:86). Furthermore,
investor relations should be open to the demands and wishes of the capital market –
availability and a willingness to discuss pressing topics are key to a high quality of
capital market communication (M ¼ 4:29, SD ¼ 0:86). Finally, the IR staff is expected
to be upfront and proactive when addressing topics of interest to the financial
community – particularly in difficult economic times (M ¼ 4:29, SD ¼ 0:75). Overall,
the factor “Quality of communication” reaffirms the findings of research on capital
market disclosure and transparency (e.g. Rao and Sivakumar, 1999; Bushee and Noe,
2000) but adds a non-financial dimension to it by focusing on personal competence and
accessibility.

4.3 Corporate governance

The factor “Corporate governance” is composed of the corporate characteristics
“Transparency of appointment policies” (I10), “Disclosure of compensation policy”
(I11), “Board structure” (I12) as well as “Transparency regarding insider trading” (I13).
Equity analysts are interested in the appointment procedures for the various governing
bodies of a company (M ¼ 3:35, SD ¼ 0:87), as these policies reflect the quality and
transparency of a company’s governance. Compensation and incentivization policies
are another relevant factor that enable the appraisal of management priorities
(M ¼ 3:60, SD ¼ 0:85). Not only the board of managing directors but also the
supervisory board, more specifically the composition of this board, exerts an influence
on equity analysts’ perceptions (M ¼ 3:70, SD ¼ 0:87). This is hardly surprising, as Investor
the supervisory board is supposed to represent the interests of the company owners relations beyond
when overseeing management. Finally, insider trading, that is, transactions conducted
by management, is of great interest to the financial community (M ¼ 3:70, SD ¼ 0:87). financials
These transactions provide an indication of the expected development of a company;
accordingly, equity analysts expect absolute transparency on these dealings. Taken
together, these characteristics form the “Corporate governance” factor, which, with an 147
average of 3.58 (SD ¼ 0:86), ranks fifth among the nine corporate factors. This factor
picks up on research on the principal-agent relationship between shareholders and
management (e.g. Berle and Means, 1932; Eisenhardt, 1989; Fama, 1980; Jensen and
Meckling, 1976). Equity analysts obviously share the perspective of investors as
owners of a company and expect a set of rules of conduct and processes, which ensure
that management acts in the best interest of the company’s shareholders.

4.4 Corporate social responsibility

“Susceptibility to regulation” (I14), “Lobbying” (I15), and “Environmental and social
sensitivity of operations” (I16) form a factor we called “Corporate social responsibility”.
With an average of 3.53 (SD ¼ 0:99), this factor is the second least pronounced of the
nine factors in absolute terms. Nevertheless, equity analysts do pay attention to
questions such as whether a company is susceptible to regulation and intervention
from public authorities, as such interventions are likely to affect the profitability of a
company (M ¼ 3:87, SD ¼ 0:88). Susceptibility to regulation is usually driven by
ecologically or socially sensitive business practices – analysts therefore try to assess
the sensitivity of a company’s business (M ¼ 3:31, SD ¼ 0:99). Conversely, successful
lobbying and good relationships with the regulatory and supervisory authorities are
seen as advantageous for the economic prospects of a corporation (M ¼ 3:41,
SD ¼ 0:99). The factor “Corporate social responsibility” matches recent research in
this area indicating the economic relevance of sustainable business practices
(e.g. Carroll, 1979; Schwartz and Carroll, 2003; Waddock and Graves, 1997; Wartick
and Cochran, 1985; Wood, 1991). Additionally, our qualitative interviews showed that
the financial community expects the issue of social and ecological responsibility and
the relationships between corporations and public authorities to become even more
relevant in the future. These issues might thus increasingly become an integral part of
a company’s overall image (Hockerts and Moir, 2004).

4.5 Branding
The factor “Branding” is composed of the characteristics “Brand strength” (I17),
“Branding acumen” (I18), and “Innovation and technology leadership” (I19). With an
average of 3.55 (SD ¼ 0:82), it is ascribed medium importance among the factors
considered, in terms of absolute averages. This factor’s composition indicates that
equity analysts realize the importance of a company’s marketing efforts – after all, the
products and services offered represent the foundation of any company’s success.
Equity analysts tend to analyze a company’s technological position (M ¼ 3:77,
SD ¼ 0:93), as innovative corporations are presumed to be able to outperform their
competitors (Christensen, 1997). A company’s aptitude in communicatively positioning
its offering is recognized as crucial to its ability to successfully reach its customers
(M ¼ 3:12, SD ¼ 0:73). Again, equity analysts assume that companies may gain
CCIJ competitive and profit advantages through their communication efforts. Finally, brand
17,2 strength, the popularity and publicity of a company’s brand(s), is regarded as a sign of
successful product positioning (M ¼ 3:75, SD ¼ 0:82). Our interview partners pointed
out that the positioning and branding of a company’s offerings represent a core leading
indicator when it comes to assembling an understanding of its state and success.

148 4.6 Reputation

The factor “Reputation” consists of the “Media coverage” (I20) and “Public reputation”
(I21) of an organization. This factor received the lowest rating of all the factors
assessed, with an average of 3.16 (SD ¼ 0:93). Given this restriction, it can be shown
that equity analysts not only observe the relationship of a company with their direct
stakeholders, such as customers or employees, but also are aware that the reputation of
a company in the public sphere indirectly influences its business (M ¼ 3:36,
SD ¼ 0:97). In this regard, it is assumed that a bad reputation, especially negative
portrayals in the media (M ¼ 2:96, SD ¼ 0:90), might lead to negative reactions of
different important stakeholders, such as customers, employees or public institutions
– who are all part of the general public. This may be of interest to corporate reputation
research, as it does confirm a relevance of public reputation on capital markets but puts
its importance into perspective compared to the images held by specific stakeholder
groups (e.g. Fombrun and Shanley, 1990; Cordeiro and Sambharya, 1997; Fombrun and
van Riel, 2003).

4.7 Consistency
The factor “Consistency” is composed of the corporate characteristics “Execution of
strategic plans” (I22) and “Consistency of strategic plans” (I23). With an average of 4.36
(SD ¼ 0:7), it is the highest-rated factor in this analysis. When analyzing a company,
equity analysts inevitably base their estimations on predictions of future
developments. An understandable and consistent strategy greatly improves their
chances of constructing a stable and reliable picture of the business. Frequent changes
to a strategy are seen as indicators of problems in operations and may therefore cause
distrust (M ¼ 4:17, SD ¼ 0:84). The financial community also relies on management to
actually implement the strategy that has previously been communicated (M ¼ 4:55,
SD ¼ 0:57). Only if management sticks to its announcements do capital market
participants stand any chance of reliably evaluating business prospects. Therefore,
“Consistency” is a particularly relevant factor for the corporate perception on capital
markets (see also Hirst et al., 1999).

4.8 Quality of management

The characteristics “Company and industry experience” (I24) as well as “Track record”
(I25) make up the final factor of this analysis, which we termed “Quality of
management”. It is ranked as one of the least important factors with an average of 3.55
(SD ¼ 0:87). As stated above, equity analysts ascribe tremendous importance to top
management’s ability to impact a company’s success. Therefore, they are eager to gain
a personal impression of a company’s senior management. Important elements
impacting their perception are the experience and curriculum vitae of managers, which
includes aspects such as previous employers and experiences gained in particular
industries (M ¼ 3:85, SD ¼ 0:89). Another important element is the experience
managers have gained within their company, that is, the duration of their employment Investor
by the company and their understanding of the company (M ¼ 3:25, SD ¼ 0:85). relations beyond
Knowledge of these characteristics enables equity analysts to draw conclusions
regarding the knowledge and skills of the people in charge. A manager’s previous financials
activities and successes are crucial to his trustworthiness in the eyes of the financial
community (see also McGregor, 2001).
149
5. Discussion and conclusions
Understanding investor relations as an image-building function is crucial to reaping all
potential benefits of their activities. Management should not limit their IR departments
to mere financial reporting. In fact, in most public companies, investor relations are the
core access point of the financial community to the organization. IR departments
manage the company’s crucial relationship with capital market participants. By
providing information on the state and development of the business, the IR department
helps enrich the financial community’s understanding of a company – it provides
crucial input into the financial community’s sensemaking efforts. A detailed, reliable
and positive image of a company, in turn, represents the basis of investment decisions
or recommendations.
Accordingly, in this study we identified the quality of the IR department – its staff,
instruments and activities – as one of the most important non-financial factors
entering the financial community’s considerations. This may be of little surprise given
previous studies that showed the impact of high disclosure standards on capital market
performance and shareholder interest (Healy and Hutton, 1999; Francis et al., 1997;
Bushee and Miller, 2007). It should be noted, though, that the quality of communication
in terms of our study also incorporates the competence, availability and experience of
the IR staff. Hiring high-quality staff and ongoing training may therefore be key to a
company’s perception as a professional and reliable communicator. Capital market
participants will judge information received from a company based on their
appreciation of and respect for the responsible IR professionals. If an IR team has been
able to establish its reputation as a professional and reliable point of contact, it will be
better situated to collect relevant input from the capital markets, dispel rumors and
false information, and manage the financial community’s access to top management.
Another important non-financial factor according to our analysis is also strongly
supported by previous research: a company’s corporate governance. Principal-agent
theory holds that shareholders strive to control the actions and decisions of top
management (Berle and Means, 1932; Fama, 1980; Jensen and Meckling, 1976). Given
the information asymmetries between company insiders and outsiders, investors
depend on governance structures that ensure a company’s stewardship in accordance
with shareholder interests (Karpoff et al., 1996; Jensen, 2000; Botosan and Plumlee,
2002). Our analysis was also able to show that capital market participants strongly
believe in the power that a company’s management team holds over the fate and
success of its organization. Accordingly, the financial community is eager to form a
personal impression of the people in charge of a business. In fact, managing the image
of a company’s top management may be crucial to a company’s perception on capital
markets – and thereby a core task of IR as an image-building function. Image
management could include providing top management with presentation and
CCIJ communication training as well as regularly briefing corporate leadership on the
17,2 mindset and expectations of the financial community.
When forming an opinion on a company’s management team, capital market
participants desire to see a credible dedication to shareholder value and a high degree
of consistency in the implementation of previously announced strategic plans. The
financial community pays close attention to the persuasiveness of top managers, their
150 personal appearance and their communication skills. Convincing leaders are expected
to be able to deliver on their promises. When managers are more consistently able to
execute their strategic plans, it is easier for the capital market to form a reliable
understanding of their business and its development. The IR function should therefore
strive to clarify the impact on shareholder value when publishing news as well as
explaining how this new information ties into the overall development of the business.
Despite its high regard for the power of a company’s management, the financial
community understands that the success of a business largely depends on the
cooperation of a range of key stakeholders. In other words: stakeholder relations
impact a company’s bottom line (Freeman, 1984; Donaldson and Preston, 1995;
Hillman and Keim, 2001). In line with this perspective, our study shows that capital
market participants are strongly interested in a company’s overall reputation and
public perception as well as its relationships with specific stakeholders such as
customers, employees or public authorities. Previous research has shown that a
favorable corporate reputation helps a company become an “investment of choice”,
enhancing its ability to attract capital at lower costs, and generating a price premium
for the company’s shares (Fombrun, 2002; Larkin, 2003; Mazzola et al., 2006). Again,
information on core stakeholder relations go beyond pure financial reporting, the
factors identified in this study therefore underline the complexity of IR’s
image-building role. By providing data on employee and customer satisfaction,
branding, customer service, employee turnover, or lobbying efforts, the IR department
directly impacts the capital market’s appraisal of a business. Seeing that the capital
market’s perception of a company is influenced by its overall reputation (e.g. as derived
from its media coverage), it becomes obvious that the IR task cannot be isolated from
that of other communication departments, such as public relations (PR) or marketing
(Petersen and Martin, 1996; Laskin, 2009). A company’s marketing, employee
communication, PR or CSR activities influence the respective stakeholder relations and
images and thereby its overall reputation (Hockerts and Moir, 2004). When addressing
the perceptions of the financial community, IR should therefore align and integrate its
activities with those of other core communication functions.
It should be noted that we chose an explorative research approach to address the
issues discussed above. Therefore, the categories and scales developed in our analysis
need further validation and testing. As the bulk of our research was conducted before
the recent financial and currency crises, it would be worthwhile to analyze how these
events have impacted analysts’ demand for non-financial information. As this study
focused on the role of non-financials in image formation, further research should
extend the analysis to the interplay and relative weight of financials and non-financials
in this context. Such an approach might create a critical link to current research on the
role of non-financials in company evaluations (Healy and Hutton, 1999; Bushee and
Miller, 2007). Finally, more research needs to be conducted on the internal
organizational structures and management processes necessary to supply the IR
department not only with crucial non-financial data, but with the discretion to actively Investor
manage capital market images. relations beyond
In summary, our study confirms that the financial community’s sensemaking
efforts are directed at a wide range of issues and corporate characteristics, far beyond financials
just financial data. It thereby outlines core elements of investor relations’
image-building function (Dolphin, 2004). IR needs to provide information on a
company’s stakeholder relations and its efforts in managing these relations. IR also 151
needs to pilot and shape top management’s exposure to the capital markets. A
well-trained staff and the quality of its activities directly impact a company’s
perception by the financial community. To positively influence the capital market’s
understanding of a company and ensure consistent messages and images, IR should
closely coordinate its activities with those of other key communication departments,
such as marketing, PR or employee communication.

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Further reading
Glaser, B.G. and Strauss, A.L. (1967), The Discovery of Grounded Theory, Aldine Press, Chicago,
IL.

Corresponding author
Christian Fieseler can be contacted at: christian.fieseler@unisg.ch

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