Interactive company-investor communication boosts both investor confidence and share values, MIT Sloan professor finds

CAMBRIDGE, Mass., Feb. 11, 2003 — Companies anxious to build or restore investor trust are increasingly turning to conference calls, according to an MIT Sloan professor whose research also finds increased share values for firms that use such interactive communication. And more and more of those calls are taking place on-line, rather than by phone.

“Conference calls and web casts can allay the suspicion of investors, said Associate Professor Kin Lo. “If management is willing to do conference calls, investors can better detect whether management is being fully forthcoming and will feel less uncertainty about the company. But if you are reluctant to be interactive, investors may infer that you are hiding something.”

According to Lo, the Internet is rapidly displacing the telephone as the primary vehicle for interactive company communications with investors, which he said have been steadily increasing and now total more than 5000 a quarter. By the end of 2002, more than 90 percent of company-investor conferences were conducted on line, compared to about 50 percent as recently as 1999. An indication of how webcasts are now a major business in themselves is the recent acquisition by Thomson Financial of Corporate Communications Broadcast Network better known as CCBN.com — which facilitates such calls and webcasts.

Smaller investors also stand to directly gain from this increase in interactive communication. “When a company holds one of these calls, it's essentially leveling the playing field between big and sophisticated investors, who have the resources to do company research on their own, and small investors, who often can't afford or don't know how to obtain such information,” said Lo “A company that is open and uses calls and webcasts to directly provide information to investors reduces this discrepancy. We found that the average investor is more comfortable investing in companies that are more open.”

Using interactive calls to reduce what researchers call “information asymmetry” the knowledge gap between sophisticated and less sophisticated traders benefits not only the investors, but a company's own bottom line, Lo found. According to his research, firms that hold one conference call per quarter can see their stock prices rise by about three percent. “Investors are reluctant to trade with someone who has greater information than they do,” he said. “As a company releases more information, investors, especially unsophisticated ones, find it less risky to invest in that company because there is now a lower likelihood that someone else in the market has more information than they do. Webcasts and conference calls reduce that uncertainty, making it more likely that people will invest.”

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Once named “Asian Businessman of the Year” by Fortune Magazine, MIT Sloan alumnus Keiji Tachikawa is the former president and CEO of global powerhouse NTT DoCoMo.

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