Gatorade, a sports drink created in 1965 at the University of Florida to help Florida Gators athletes replenish electrolytes, carbohydrates, and water during sport activities, is the leading brand among consumers. In fact, Gatorade accounts for about three fourths of all sports drinks sales. It is no surprise that it was a prominent target for acquisition by large drink companies. In 2000, it looked like Gatorade would become a part of the Coca‐Cola family. The acquisition deal was pioneered by Douglas Daft, who at the time was both the CEO of Coca‐Cola and the chairman of its board of directors. With his support, the deal seemed set in stone. All the due diligence and formalities were completed, press releases were drafted, and even a conference call with analysts was already scheduled to announce the acquisition. Yet, at the last second, Coke investors through their representatives on the board of directors led by Warren Buffett, cancelled the deal. The Wall Street Journal concludes: “How Coke’s biggest acquisition attempt ever was fumbled is the story of a CEO who couldn’t – or wouldn’t – force his will on his board” (McKay, Deogun, Spurgeon, & Eig, 2000). But it is also a story of a growing power of investors that in turn makes investor relations, a function responsible for managing relations with investors, shareholders, financial analysts, and other members of the financial community, top priority for corporations around the world.

Defining the Concepts: What Is Investor Relations?

The well‐known scholarly definition of public relations describes the profession as “a management function that establishes and maintains mutually beneficial relationships between an organization and the publics on whom its success or failure depends” (Broom & Sha, 2013, p. 5). Here, the word “publics” is used generically and can be replaced with a specific public depending on the function – for example, for employee relations, it would be employees, and the definition then would become “a management function that establishes and maintains mutually beneficial relationships between an organization and the employees on whom its success or failure depends”; for media relations, it would be media and the definition would say a “management function that establishes and maintains mutually beneficial relationships between an organization and the media on whom its success or failure depends,” and so on. As a result, if one wanted to create a definition of investor relations as a public relations function, that definition might read: “Investor relations is a management function that establishes and maintains mutually beneficial relationships between an organization and the investors on whom its success or failure depends.”

In addition to this scholarly definition, professional associations offer their own takes on public relations and investor relations. The Public Relations Society of America (PRSA) defines public relations as “a strategic communication process that builds mutually beneficial relationships between organizations and their publics” (PRSA, 2018). Once again the generic word “public” can be replaced with the particular publics for various public relations subfunctions. In case of investors as the target public, the definition could be changed to this: Investor relations is a strategic communication process that builds mutually beneficial relationships between organizations and their investors.

The leading professional association of investor relations, the National Investor Relations Institute (NIRI), provides a more elaborate definition. Investor relations is defined 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” (NIRI, 2018).

All three of these definitions have a lot in common, but there is an important difference in the final goal of the investor relations function. The first definitions that come from the public relations realm state the final goal is a relationship, building and maintaining it. The investor relations definition from NIRI, however, states the overall goal as the share price – to contribute to company’s fair valuation. However, recent studies of investor relations practitioners showed that those who actually practice investor relations on a daily basis are not happy with either one of these metrics. In fact, Ragas, Laskin, and Brusch (2014) state that the respondents in their study “strongly rebuked … the notion of using company share price as a valid measure of the success of investor relations (p. 186). At the same time, respondents in Laskin’s (2011) study doubted that relationship can be an objective measure of investor relations as it is difficult to measure and evaluate the quality of a relationship.

Most recently, Laskin (2018) proposed that the overall goal of investor relations should not be relationships or a share price, but expectations about them, and the function becomes a function of managing expectations. This transforms the long‐known equation ROE from return on equity to return on expectations. This is also in line with the efficient market hypothesis, the key theoretical proposition governing the financial markets (Fama, 1970). The efficient market is a market in equilibrium: all securities are fairly priced – no investors can consistently outperform, or beat, the market. The efficient market hypothesis, however, requires key assumptions to be met: all relevant information about the company and its performance is publicly available, all market participants have equal access to such information on a timely basis, and all investors are rational and capable of evaluating the information available to them. Much attention in the financial world has been devoted to access to information as a key requirement for the efficient market – in order for all prices to fully and fairly reflect the underlying value of securities, all market participants must have full and fair access to information about such value. This led to promulgation of Regulation Fair Disclosure (Reg. FD or Regulations FD) in August 2000. The US Securities and Exchange Commission (2014) explains that “Regulation FD aims to promote the full and fair disclosure” by eliminating the practice of selective disclosure and enabling all investors, large and small, to access the same information.

But is access to information enough? Several studies by Laskin (2009, 2010, 2011, 2014a, 2016b) claim full and fair disclosure is not sufficient. For the efficient market hypothesis to work, in addition to access to information, investors need comprehension and understanding of this information. This means that investor relations officers, in addition to disclosing information, must also help investors understand what was disclosed, what this information means, and what reasonable expectations could be developed based on this information. In other words, investor relations officers educate investors about the company and its value. Laskin (2018) concludes: “As a result, for the investor relations officers to be successful in the context of the efficient market hypothesis they must do significantly more than just put the information out there – they are also responsible for making sure their messages are received, understood, processed, and acted upon.”

How and Why Is Investor Relations of Concern to Public Relations?

As shown, investors are one of many publics that organizations need to build and maintain relationships with. As a result, there is little doubt that public relations should be concerned with investor relations. In fact, the Body of Knowledge Task Force of the PRSA included investor relations as one of the seven subfunctions of public relations, along with media, internal/employee, consumer, community, government, and fundraising/donor relations (PRSA Task Force, 1988). Most recently, Laskin (2014a) claimed that investor relations is a public relations function: “Investor relations [is placed] directly into the public relations domain” (p. 201).

Furthermore, investor relations may not be just one of the functions of public relations – it may be one of the most important functions. Specifically, Grunig, Grunig, and Dozier (2002) suggested that investors have significant power over corporations, which makes them a very influential type of public. As a result, investor relations practitioners are more likely to practice the two‐way symmetrical model in comparison with other public relations functions.

The importance of investors as a public may also suggest that investor relations takes priority over other functions – with more resources devoted to the function. Allen (2002) notes that investor relations is right at the top of the corporate agenda. A BNY Melon (2011) study concludes that a large publicly traded company spends approximately $1 million or more annually on investor relations. Ragas et al. (2014) state: “the corporate sector as a whole invests hundreds of millions of dollars per year in this function” (p. 177). Investor relations practitioners are also often ranked as the highest paid out of all public relations professionals (PRWeek, 2006; Laskin, 2014a).

Finally, the importance of investors as a public may suggest that investor relations practitioners are more likely to have a proverbial seat at the table – in other words, be part of the top management team of the organization – in comparison with other public relations functions, such as media relations or community relations (Ragas et al., 2014).

How, When, and Why Is Theory Applied to Investor Relations?

As explained, companies spend millions of dollars on investor relations. As a result, companies expect some kind of a return from this investment. Consequently, a significant part of theory‐driven research in investor relations focuses on measuring this contribution. Measurement and evaluation are very important in investor relations, yet investor relations is not easy to measure (Ragas et al., 2014; Laskin, 2011; van Riel & Fombrun, 2007; Cole, 2004). On one hand, unlike other public relations functions, investor relations seems to have a ready‐to‐go quantitative metric – a share price. On the other hand, a direct link between share price and investor relations is difficult, if not impossible, to establish, as a company’s valuation can be influenced by a variety of internal and external factors. What, then, can be considered a proper metric for measuring investor relations?

Another growing theoretical area is relationship management. In 1984, Ferguson famously proclaimed that for public relations “the unit of study should not be the organization, nor the public, nor the communication process. Rather the unit of study should be the relationships between organizations and their publics” (p. ii). This proclamation spurred a strong body of research on relationship management – Sallot, Lyon, Acosta‐Alzuru, and Jones (2003) rank relationship management as one of the most researched perspectives in public relations. For investor relations practitioners building and maintaining relationships with their publics is of vital importance – institutional investors, financial analysts, buy‐side and sell‐side, retail shareholders, stock exchanges, regulatory organizations, media, activists, as well as internal publics, such as management teams, boards of directors, employees – each one of these publics may have a forceful effect on the investor relations job, pushing the share price sky high or destroying all the value in the company (Laskin, 2010). Relationships, however, are not easy to evaluate. Thus, research often focuses on trying to better understand relationships in investor relations.

A third area where theory is often applied in investor relations focuses on various communications produced in the context of performing investor relations tasks. Investor relations officers are responsible for producing earnings releases as well as quarterly and annual reports (Heath & Phelps, 1984; Hutchins, 1994; Lord, 2002). These are important documents that talk about past and future performances of companies and shape expectations of a variety of publics (Kohut & Segars, 1992; O’Donovan, 2001; Sidle, 2009; Rosenkranz & Pollach, 2016; Laskin, 2018). In addition to written communications, investor relations officers are responsible for a variety of oral communications – conference calls, investor conferences and investor days, roadshows, and so on. Much research has been devoted to analyzing these texts and the rhetorical devices employed to frame the company’s performance (Subramanian, Insley, & Blackwell, 1993; Kwon & Wild, 1994; Anderson & Epstein, 1995; Abrahamson & Amir, 1996; Laskin & Samoilenko, 2014).

Finally, a significant part of investor relations scholarship focuses on analyzing investor relations as a profession. These introspective studies evaluate the role and place of investor relations departments within organizations, discuss the educational and professional backgrounds of investor relations officers, study budgets, activities, and chain of command, and similar (Petersen & Martin, 1996; Laskin, 2009, 2014a).

Examples of Theory Used with Investor Relations

Probably the earliest theories used in investor relations are part of the rhetorical paradigm. The first documented study actually focused on readability of annual reports and dates back to 1952 (Pashalian & Crissy, 1952). Many of these early studies use the Flesch readability formula as their theoretical foundation. The Flesch readability formula combines measures of sentence length and syllable count of individual words in order to evaluate difficulty (or ease) of reading textual material (Flesch, 1951). It was originally developed to evaluate elementary reading abilities but was eventually expanded to a variety of reading materials, including corporate communications, as an “easy, objective, and reliable alternative” (Jones, 1988). Readability originally was considered a measure for effectiveness of investor relations communications, specifically as it relates to communicating financial information: “The communication of accounting information to external users is of fundamental importance to published accounting reports” (Jones, 1988, p. 300). Today, even more so, disclosure of financial information is regarded as an important contributor to corporate value (Argenti, 2007; Laskin, 2016b).

Over time this type of research grew exponentially. In fact, Stanton and Stanton (2002) and Rutherford (2005) note that there were more studies on readability than all other types of rhetorical studies put together. Among these studies are Soper and Dolphin (1964); Smith and Smith (1971); Healy (1977); Barnett and Leoffler (1979); and Clatworthy and Jones (2001). Such studies typically conclude that the reading level of disclosure is prohibitive and incomprehensible. In fact, Jones and Shoemaker (1994) note that such disclosure can be categorized as inaccessible to a large proportion of the shareholders.

The research also became more sophisticated – from one Flesch index more than 30 various readability formulas were developed. For example, Thomas (1997), when studying letters to shareholders, analyzed several linguistic instruments in each document: transitivity, thematic structure, context, cohesion, and condensation. Arguably, the most complex and sophisticated approach to such an analysis was developed by Hart. Having reviewed a variety of literature applying rhetorical theory to analysis of political, managerial, organizational, and other texts, Hart (2000, 2001) identified 35 narrative strategies that can be applied to analyzing texts. The narrative strategies can be defined as ways of “argumentation as individuals seek to convince an audience of a construction of reality congruent with their interests (through justification) yet undermining of others (through criticism)” (Symon, 2008, p. 78). The 35 strategies identified by Hart are organized into five categories, called composite strategies: certainty, optimism, activity, realism, and commonality. Most recently, Laskin and Samoilenko (2014) applied Hart’s methodology to studying annual reports.

In addition to complexity of data analysis, the studies became more sophisticated in terms of their explanation. Relying on research by Habermas (1984, 1987), Yuthas, Rogers, and Dillard (2002) proposed that corporate disclosure may be “used to transparently communicate performance information or to instrumentally influence stakeholders to act in the interests of the company” (p. 142). Laskin (2010, 2018) advances this claim and proposes that financial communication and investor relations are never a mere disclosure. Instead, they are a complex strategic function of managing expectations: organizations rely on communications to their investors, financial analysts, and other financial audiences to shape perceptions of organizational outcomes. This managing of expectations is done through rhetorical means. As a result, readability and other narrative strategies are now compared with such corporate metrics as net profit, return on capital, share price, or overall industry performance. Several studies actually proposed that difficulty in reading and understanding financial disclosure may be not in error or by accident, but by design (Keusch, Bollen, & Hassink, 2012). Adelberg (1979), Baker and Kare (1992), Courtis (1998), Bloomfield (2002), and Laskin and Samoilenko (2014) have suggested that managers may, in fact, have incentives to obfuscate information in the disclosure documents, especially in cases where firm performance is exceptionally poor. This became known as an obfuscation theory. Others suggested that the opposite should also be true – when firms perform exceptionally well the disclosure documents should become easy to read and understand (Schrand & Walther, 2000; Li, 2008).

Of course, this stream of research drew its share of criticism as well. Courtis (1986, 1998), having reviewed the usage of readability formulas and concerns whether such formulas can, in fact, measure the readability difficulty of narrative disclosures, summarizes:

Readability formulas are simplistic in that they enable a passage of selected text to be represented by a single summary score, which at best is merely a general estimate of difficulty. The formulas concentrate on only those aspects of sentence construction which can be conveniently measurable, such as the attributes of word and sentence construction, i.e., number of syllables in a passage, number of polysyllabic words, number of words with seven or more letters, and sentence length. Other important matters such as syntax, style, format, graphic design, logic, conceptual density, human interest, organization and reinforcement are not considered. Moreover, formulas pay no heed to the way new concepts are introduced, nor to the motivational nature of the materials. (Courtis, 1998, p. 460)

Nevertheless, research on readability remains an important and popular contributor to the investor relations scholarship. In fact, scholars, professionals, and regulators continue to view text quality as one of the most important issues. The US Securities and Exchange Commission even released plain language guidelines for corporate disclosure with specific recommendations on how such disclosure should look: “short sentences; definite, concrete, everyday language; active voice; tabular presentation of complex information; no legal or business jargon; and no multiple negatives” (Glassman, 2005, para. 20).

Another important stream of research in investor relations focuses on analyzing the profession itself. Petersen and Martin (1996) surveyed CEOs in order to find out their views on investor relations. Although descriptive in nature, the research relied on the excellence study (Grunig, Grunig, & Dozier, 2002) as its theoretical foundation, specifically focusing on roles theory, to find out if CEOs viewed investor relations as a managerial or technical function. The study found that in practice investor relations rarely reports to public relations and people who practice investor relations rarely have any public relations training.

Laskin (2009, 2014a) continued this type of research, also analyzing the profession and the role of practitioners, with similar results: in the United States at least, investor relations is dominated by financial rather than communication expertise. But perhaps the most theoretically driven study was the research conducted by Kelly, Laskin, and Rosenstein (2010), where the practice of public relations was analyzed using the four models of public relations (press agentry/publicity, public information, two‐way asymmetrical, and two‐way symmetrical) as well as four dimensions of public relations (asymmetrical effects, symmetrical effects, one‐way communication, and two‐way communication). This research was the first study to find a predominant use of the two‐way symmetrical model across its sample: “This study shows that the two‐way symmetrical model does exist in the real world, and it can be found in the bastion of capitalism – publicly owned corporations in the United States” (p. 205). This refutes common criticism of models of public relations that symmetrical communications are a “utopian ideal’ (Pieczka, 1996).

Research on investor relations has not been limited to the profession in the United States alone. Hoffmann, Tutic, and Wies (2011) studied investor relations professionals at Euronext 100 companies; Marston (1996) and Dolphin (2004) studied the investor relations function in companies in the United Kingdom; Tuominen (1997) studied investor relations in Finland; Laskin and Koehler (2012) conducted comparative research looking at both European and US investor relations practices, and Koehler (2014) studied companies from the United States, the United Kingdom, France, Germany, and Japan. Overall, however, studies on financial communication and investor relations outside of the United States or Europe are quite rare.

Measuring the impact of investor relations is a fast‐growing area of research. And it is not surprising: “Vague assurances of goodwill and its invisible long‐term impact can no longer persuade vigilant CEOs and upper management” (Kim, 2001). Thus, it becomes important to show and actually measure the contribution to the company’s bottom line (Laskin, 2016a). Much of this research is grounded in the efficient market theory and agency theory – specifically, claiming that a function of investor relations should be to decrease the information asymmetry between shareholders and managers as their agents, who also may have different self‐interests (Jensen & Meckling, 1976; Farraghe, Kleiman, & Bazaz, 1994; Brennan & Tamarowski, 2000; Healy & Palepu, 2001; Bushee, Jung, & Miller, 2011; Dimitrov & Jain, 2011; Laskin, 2011; Ragas & Laskin, 2014; Ragas et al., 2014).

The efficient market hypothesis primarily associated with research by Fama (1970) states: “A market in which prices always ‘fully reflect’ available information is called ‘efficient’” (p. 383). Such a market is in equilibrium: all securities are fairly priced, according to their risks and returns. No investors can consistently outperform, or beat, the market, and thus there is no reason to constantly buy and sell shares of companies to try to outperform the average market return.

The efficient market hypothesis, however, requires key assumptions to be met: all relevant information about the company and its performance is publicly available, all market participants have equal access to such information on a timely basis, and all investors are rational and capable of evaluating the information available to them. Fama (1970) talked about three levels of market efficiency – weak, semi‐strong, and strong. In the weak form of market efficiency, not all information is available to all market participants and, as a result, some investors can outperform others by taking advantage of better or faster access to information. In the semi‐strong form of efficiency, all public information is equally available to everyone and, as a result, already reflected in the stock price; however, there may be other, nonpublic information that is not reflected in the stock price and, as a result, somebody with access to such information through, for example, insider trading can beat the market. And, finally, in strong market efficiency, all information is reflected in the stock price and all investors – internal and external – have the same access to information and the same knowledge and understanding of the company. Once again, investor relations, a function charged with providing information about the company to shareholders, financial analysts, and other market participants, is at the very foundation of the efficient market hypothesis. So, Laskin (2016b) proposes that investor relations officers must engage in educational efforts with the goal of educating investors, “essentially outsiders, to fully grasp the value” of the company and its business model (p. 378).

Finally, an important theoretical area of investor relations research focuses on relationships between organizations and their many financial publics, including trying to better understand these publics and their diverse needs. In fact, one of the earliest studies of investor relations from the public relations standpoint is based on applying the situational theory of publics in the investor relations context (Cameron, 1992). Penning (2011) studied retail shareholders in order to understand their informational preferences by applying uses and gratifications theory and the situational theory of publics, while Arvidsson (2012) analyzed financial analysts as a target public for investor relations. Koehler (2014) studied relationship building in investor relations on a theoretical foundation of dialogic communications.

The call for a relationship focus that was initially made by Ferguson (1984) was greatly supported and expanded by a variety of scholars. Already in 1997, Broom, Casey, and Ritchey (1997) claimed: “Many scholars and practitioners say that public relations is all about building and maintaining relationship” (p. 83). They also made an important contribution to the field by trying to define what relationship actually is by reviewing relationship definitions from other fields: interpersonal communications, psychotherapy, organizational behavior, and systems theory. Ledingham and Bruning (1998) defined relationship as a public relations concept as “the state which exists between an organization and its key publics, in which the actions of either can impact the economic, social, cultural or political well‐being of the other” (p. 62). Finally, Hon and Grunig (1999) described the specific dimensions of relationships between organizations and their publics as control, mutuality, trust, commitment, and satisfaction, and identified as well two types of relationships: the exchange relationship and the communal relationship. Chandler (2014) studied CEOs’ views on investor relations using relationship management theory and found support for these four dimensions in the investor relations context.

Major Topics/Questions Needing to Be Addressed by Public Relations Theorists Working in Investor Relations

Despite a variety of research described above (and see also Table 15.1), there are many areas of investor relations still understudied. In fact, Laskin (2014b) points to the lack of theory‐building and theory‐testing research in investor relations, claiming that most “simply provide descriptions of the current status of the field” (p. 127). For example, investor relations is often regarded as one of the most regulated areas of public relations, so research on laws and regulations and how companies adapt to them is of paramount importance. Some studies have been done in this area – for example, Pompper’s (2014) study of the impact of the Sarbanes‐Oxley Act based on a theory of planned behavior – but more research is needed.

Public relations has seen a significant growth of scholarship in social media and new media technologies over recent years. Although investor relations officers are less active on social media than, for example, consumer relations practitioners, new media still have a significant impact on investor relations. A few studies conducted in this area show that new media tools “are being embraced” in investor relations (Arvidsson, 2012, p. 109), but theory‐based research in this area is very limited. Social media, meanwhile, whether investor relations professionals use it or not, can have a strong effect on their jobs and their company’s operations. For example, a study of Twitter found that the sentiment of posts on Twitter about 30 stock companies had a strong correlation with abnormal stock returns during the peaks of Twitter volume (Ranco et al., 2015). Similarly, Sprenger, Tumasjan, Sandner, and Welpe (2014), using computational linguistics, discovered an “association between tweet sentiment and stock returns, message volume and trading volume, as well as disagreement and volatility” (p. 926). Investor relations officers need to know how to monitor, analyze, and respond to what is being said about the company on social media. Thus, research on social media in investor relations is needed.

Finally, as mentioned earlier, investor relations research is primarily limited to the United States and Europe. The world of finance, however, is truly global – a company can have investors from all parts of the world. So, future research in investor relations should expand to cover other regions of the world: Asia, South America, Africa, and Australia, including such fast‐growing countries as China, India, Brazil, Russia, and South Africa. In addition to regional research, global investor relations should study investor relations in the context of global corporations and global investment strategies.

Suggested Case to Explore to Demonstrate Theory at Work in Investor Relations

An excellent opportunity to study investor relations arises when a company is dealing with investor activism – this is when investor relations can make or break the corporation. In fact, Rao and Sivakumar (1999) suggest that investor relations was recognized as a profession primarily due to the growth of social movement activists with strong antimanagement bias. One of the recent cases of shareholder activism involves CONSOL Energy and New York City Public Pension Funds (Uysal, 2014; see also Sanzillo & Kunkel, 2014). NYC Pension Funds is in a unique position – on one hand, as a pension fund, it must make money for its clients, on the other hand, as an organization representing the City of New York, its investments must adhere to higher ethical standards than the standards of a regular mutual fund. Specifically, NYC Pension Funds is committed to “pressuring many of America’s largest companies to improve workplace conditions, protect the environment, promote human rights abroad, and adhere to accepted corporate governance standards” (quoted in Uysal, 2014, p. 221). Such a position is known as social shareholder activism, when organizations are held accountable for not just making profits but also for making the world better and bringing about social change.

In the case of CONSOL Energy, particularly in relation to its coal operations, NYC Pension Funds filed a shareholder resolution on corporate response to climate change. CONSOL Energy then had three possible responses: block, exclude a resolution from the annual meeting materials; settle, engage in a dialogue with the fund to find a solution that would satisfy both parties; fight, let the resolution go for a vote and try to win this vote. The first and third options, block and fight, are adversarial options, while the second option, engaging in a dialogue, can be considered a cooperative response.

Analyzing this case presents a great opportunity for evaluating theories in investor relations as it highlights several of them: agency theory, efficient market hypothesis, dialogic communications, situational theory of publics, relationship management, and, in this case, in studying the actual texts of the resolutions, rhetorical and lexicosemantic theories.

Discussion Questions

1. 1 Why do you think investor relations became “one of public relations’ most unfortunate paradoxes” with high importance but little research (Kelly et al., 2010)?
2. 2 Why are some areas of investor relations more developed and have seen more research than others?
3. 3 What area of investor relations research in your opinion is the most important for practitioners?
4. 4 Why do you think some say that if the efficient market hypothesis were true, there would be no stock trading?