While the long-term consequences of the global settlement with major investment banking firms are still unknown, it is clear this agreement has already caused a radical transformation in the way brokerage research is conducted and sold. Without the lucrative link-up between investment banking and equity research, many observers anticipate further reductions in research budgets, increased policing of Wall Street firms, and a sustained exodus of sell-side analysts heading to retirement or off to the buy side.
Currently, the 100 largest stocks (with a market cap above $21 bn) are followed by an average of 23 analysts. The average number for all public companies is a meager two with the majority of stocks receiving no coverage.
With research budgets slashed, the profession’s appeal to younger analysts tarnished, and a dwindling number of honest incentives to support credible analysis, the amount and quality of Wall Street research is bound to decline even further. This increasing shortage of investment analysis and company information will no doubt have a negative effect on capital raising, trading and even transparency for the capital markets in general.
For investor relations, the decline in the amount of sell-side coverage will force IROs – particularly at smaller companies with lower market caps and liquidity levels – to be more creative in their efforts to educate and inform the investment community. In this new environment, investor relations professionals need to develop methods that will help them counteract the ‘information shortage’ brought on by the global settlement.
In some cases, the most fitting response may be the most traditional one: direct outreach to investors by senior management. And particularly now, with sell-side research discredited in many investors’ eyes, there is an even stronger interest in face-to-face meetings with senior corporate executives.
While there is no substitute for direct ‘pressing of the flesh’, IR professionals might want to consider adding a more novel tool to their communications kit. With the ease and power of today’s communications networks, an increasingly attractive and less labor-intensive solution would be for IROs to develop analyst-style reports to communicate a company’s investment story. These reports could be distributed through the corporate web site.
These reports would not pose as objective sell-side research, but they could prove extremely useful in providing investors with larger industry trends and the company’s strategic, financial and operational information in a familiar format.
Although such a report would obviously not be the same as one prepared by a well-known analyst with expertise in the sector, it would have its merits. It would incorporate the necessary facts, statistics and viewpoints about the sector, as provided and interpreted by the company itself.
Outside IR consultants would be in a position to support such an effort as they are often ex-analysts themselves who have authored countless sell-side reports, and could employ the same analytic and intellectual rigor that one would expect from a good sell-side analyst. These professionals would also provide IROs with an objective point of view, helping to ensure that the report would not appear simply as another investor presentation.
Reports of this sort would serve the purpose of differentiating among companies as well as increasing the flow of information to the investment community at a time when the traditional source of this data is running dry. Moreover, such reports should not be confused with what appears to be another response to the information shortage: the increased interest in outsourced reports typically associated with OTC stocks.
It is impossible to say how security analysis will develop in the new regulatory environment. What is certain, however, is that rigorous, well-written, analytic examination of investment opportunities is an absolute necessity for the capital markets to function efficiently.
Investor relations professionals can assist companies in providing a clear, accurate analysis of company strategy and operations to investors. These company-sponsored reports, while not purporting to be independent – or even objective – research, may well turn out to be more valuable to investors than the secretly tainted sell-side research of the past.
