Investor Relations and Stakeholder Communications (IRSC) and Cost of Debt and Equity Capital

Abstract

In this study, we examine whether firms’ engagement in Investor Relations and Stakeholder Communication (IRSC) activities reduce the cost of information asymmetry at the time of external financing. We also analyze the intermediary role of financing source (debt vs equity) and the existing level of firm transparency. Measures of IRSC initiatives are frequency of press releases, frequency of events (conferences and meetings, including industry gatherings as well as investment bank seminars), ratio of question and answer portion to the length of events, the average length of answer per question asked during events, and the frequency of slides used in event presentations. Sample includes 1,190 firms listed on S&P1500 index (small, medium, and large-cap firms on NYSE, AMEX, and NASDAQ stock exchanges) from 1999 to 2018. Multiple regression analyses (with robust standard errors) show that press frequency and the portion of question and answer in events have a significant and positive relationship with the cost of financing and event frequency and the average length of answers have a negative association with the cost of financing. Multivariate multiple regression analyses (seemingly unrelated regression models) are used to control for simultaneous effects of debt and equity issue and show that these findings are more pronounced for firms of lower transparency who are going to issue equity compared to firms of higher transparency who are going to issue debt.