Investor Relations and Corporate Reporting

MA-Thesis / Master von Stefanie Paolini

Introduction:

Nowadays, deregulated and globalized financial markets force companies into competition for investors. The challenges capital market-oriented companies have to meet are increasing information needs of investors and rigid rules and regulations. Well implemented and managed Investor Relations and Corporate Reporting activities that gain the trust of the financial market could assist in facing up to competition.

Financial and Corporate Reporting is all about communicating the long-term strategic alignment, quality and experience of the management as well as other factors that determine the value of the company, e.g. a sustainable, solid business development associated with a transparent corporate communication. From investor’s and analyst’s points of view, which are geared to a forward-looking approach in case of an investment decision, the information value of traditional and predominately retrospective financial statements encounters its limits.

The ambition of legislator and standard setter to make the group management report to a value- and future-oriented instrument is a signpost in the right direction. The group management report should additionally facilitate estimates about the future development of the company by a stronger consideration of the management’s view. Numerous empirical studies provide evidence that the capital market is affected by imperfect and unequally distributed information (asymmetric information distribution) as well as by conflict of objective and interest between the management (agent) and shareholder (principal).

Modern Investor Relations and Corporate Reporting activities go beyond the mere communication of facts and figures. Investor Relations and Corporate Reporting reduce skepticism and create transparency by building up a direct relationship to the investor.

The present master thesis examines interdependencies between companies and investors as well as the organizational integration in the company’s structure by means of scientific theories. In addition, a primary research of 10-DAX companies regarding their Investor Relations and Corporate Reporting activities ascertains how several communication measures are effectively applied in practice and how much importance companies attach to well managed capital market communication.

The survey reveals strengths and weaknesses of today’s capital market communication and outlines future prospects of Corporate Reporting.

The present master thesis „Investor Relations and Corporate Reporting - An empirical analysis of 10 DAX-companies” is structured into six chapters. It starts with the introduction which includes the executive summary and the scope of work that is realized in here.

The second chapter deals with a detailed definition of the problem that causes the relevance of this master thesis, the determination of the objectives as well as the methodology that describes the assignment’s structured procedure.

Chapter three provides the fundament on which the theme of the thesis may then be developed and elaborated. The general basics on Investor Relations and Corporate Reporting should offer the reader the opportunity for a first step into the topic.

Chapter four is focused on the relevant theories of Investor Relations and Corporate Reporting. At this juncture in particular the neo-institutional theory including the principal agent and the transaction cost theory is being analyzed. A determination is made to what extent the theories are applicable to explain Investor Relations and Corporate Reporting activities.

In chapter five a primary research is realized that reflects the findings of the previous chapters and introduces the results of the survey of 10- DAX companies regarding their Investor Relations and Corporate Reporting activities. This chapter covers the theory of the empirical study including all relevant aspects of the survey, e.g. the conception, the definition of the survey target, the identification of the population and sample and the questionnaire design. It also contains the data analysis of the empirical study and exhibits the knowledge gained verbally and graphically as well as outlines the findings for Investor Relations and Corporate Reporting.

Finally, the results of this master thesis are summarized; especially whether the set objectives are reached as well as critical comments about the master thesis are given in the last chapter. Furthermore, an outlook about possible future effects of applied Investor Relations and Corporate Reporting is provided.

Table of contents:

Text Sample:

Chapter 3.2.6.1.2, Voluntary measures:

Shareholders’ letters and newspapers:

Shareholders’ letters are especially suited for addressing individual investors during the year. The enterprise generally sends out such notices upon the occasion of special events such as, for example, important acquisitions, the announcement of quarterly figures or upcoming increases in capital.

While shareholders’ letters serve the purpose of notifying investors about extraordinary events, shareholders’ journals appear at regular intervals to meet the desire of the financial community for continuity in communications. The advantage of this is to be seen in the fact that a shareholders’ newspaper can create an emotional bond between shareholders and the joint-stock company. As a result, trust and confidence in, or loyalty to, the enterprise is strengthened, which is especially helpful in crises. In Germany, however, shareholders letters and journals are only used by a few enterprises as an Investor Relations instrument. The reasons for this are that these notices can only be sent to those shareholders who are registered with the enterprise (listed in the register of name shares, on mailing lists, etc.) and cause costs to be incurred in connection with the printing and mailing. A more inexpensive alternative is to send these by e-mail.

Financial / image advertisements:

An additional Investor Relations instrument includes financial advertisements. In the past, enterprises used advertising in the press almost exclusively to advertise their products and services. In the meantime, there is a trend in the direction of using these advertisements more and more in the area of public relations, i.e. the aim is to create a positive corporate image of the enterprise through advertisements. Only those advertisements which are intended to serve the needs of the capital market are part of the tasks of Investor Relations here, however. That is why advertisements are primarily run in reputed business newspapers. The impact of financial advertisements is a subject of some controversy. Although advertising is still a useful means of attracting the attention of a broad public to the enterprise, to gain potential investors and to achieve an image transfer from well-known or successful products of a company to its share, it is associated with high losses because it is not targeted. In designing an advertisement it must above all be ensured that in addition to grabbing the attention of the recipients and the message which is to be conveyed, a possibility is also offered to request additional information. This can allow interested investors to be included in the mailing list, which will then ensure that they are supplied with publications in the future. As a result of the previously mentioned image-promoting function of this Investor Relations instrument, it is particularly important in designing the advertisement that a uniform corporate design be used. Financial and image-related advertising should especially be used in the run-up to increases in capital and when companies go public. Additional reasons include, for example, the invitation to attend the annual meeting or the announcement of important acquisitions.

Television / radio / videotext / internet:

This media has been discovered by Investor Relations and has been experiencing an upswing since Deutsche Telekom AG and additional enterprises which are well-known or familiar to end consumers went public, in particular EM.TV and Mobilcom. These instruments are not only used in the course of the initial emission, however, but also increasingly in the highly competitive capital market for potential investors in a company’s own share. Enterprises can use TV/radio and videotext either through targeted advertising spots or by participating in exchange TV and radio programmes. This has become possible in particular through the increasing fragmentation of specialised channels such as N 24, n-tv or Bloomberg TV. Aside from business and company news, or live advertising programmes at exchanges, interviews with company representatives are also televised.

The Internet is another ideal, up-to-date and inexpensive media for Investor Relations. Many enterprises still have problems using this communications channel in an efficient manner, however. Especially the interactivity of the Internet has thus far been used to little for direct dialogue with investors by digital Investor Relations and is another area where there is potential for improvement.

Press releases:

The most important voluntary Investor Relations instruments include press releases, which effectively reinforce the impact of a brief notice. This can help ensure direct and rapid coterminous dissemination of information. These primarily inform the business and financial press about current events at the enterprise. Examples of contents of press notices include important product innovations, the penetration of new fields of business or also resolutions of supervisory board meetings and annual meetings. Directly receiving an unfiltered press release and not having to wait to receive such through electronic media is of crucial importance and the importance of this should not be underestimated. Usually press releases are published by fax or e-mail.

Generally it is a good idea to also send press releases to other target groups such as, for example, analysts, brokers and investors, as this can ensure direct, coterminous and rapid conveyance of information. Moreover, a better relationship based on trust and confidence can be established with other target groups. At the same time it is important to only publish those topics which really attract the interest of the financial community. The press release should be readily understandable, clearly formulated and restricted to the most essential information. Restriction to the most important information is of enormous importance because extensive information on the company can often cause the press to significantly curtail and change the content; here it is important to adhere to the principle that only the most important information should be conveyed.

Fact book / investor manual:

A fact book, also referred to as an investor’s manual, is an important reference work for the financial community. It supplements the annual report with the aim of making additional company data of importance to professional members of the financial community separately. The content conveys a look at the business, products, objectives and strategies of the enterprise and the long-term development of finance, management, staff and share-related information to readers. It is generally maintained that there is no danger of an insider problem with the fact book, as it does not contain any data bearing relevance to the share price.

Fact books have a long tradition in the USA, but are also gaining importance in Germany, as they constitute a suitable instrument for the continuous Investor Relations work of a corporation. Of particular importance is the updating and expansion of the fact book. For cost reasons, however, only truly fundamental changes such as e.g. a merger or the establishment of a new business field should prompt the immediate publication of a new fact book. Otherwise it is advisable to revise the investor manual once a year and complete it at roughly the same time as the annual report.