Investors in the dark about investments post-crisis

Investors' understanding of key business drivers has deteriorated since the credit crisis, finds a new survey by business advisory firm Corporate Executive Board (CEB). 

The survey finds that investors want more from companies and their IR teams. According to those polled, responsiveness alone is not sufficient for the majority of investors and analysts. Only 13 percent of those polled say responsiveness helps improve their understanding of a company; more than 63 percent want IR to ask more questions of them.

The most effective companies focus on teaching investors how to model their business and diagnose any misunderstanding in the market, says the report’s author.

Mike Griffin, managing director of the corporate finance practice at CEB, thinks companies should offer investors more ways to view their businesses. 

'We think firms should publish the management perspective, in other words, how the management teams model the business internally,' Griffin tells IR magazine. 'The opinions of the buy side and the sell side are growing further apart and understanding business fundamentals has got more difficult. So companies need to work harder to educate the market.'

And he adds: 'We were surprised to see the extent to which analysts are still struggling to understand the businesses they cover.'

The report findings indicate that effective investor education can boost valuations. More than 90 percent of investors say they are willing to pay more for a stock when a company’s IR department is effective at improving their understanding of the business fundamentals. 

CEB’s research shows that investors pay a 17 percent valuation premium on average for companies that are top-quartile at clarifying their business model for investors. 

The survey was the result of interviews with nearly 350 buy and sell-side analysts and portfolio managers. 

'The lack of clarity is the problem but there is an opportunity for companies to get the premium,' Griffin adds.