This research concerns relationships between effective IR and stock pricing andstock liquidity and analyst coverage. This thesis develops the IR literature byusing an original and focused measure of IR performance, numbers of firms'nominations for the Investor Relations Magazine IR awards 1999-2002, and bytesting for any direct relationships between firms' number of award nominationsand stock price, liquidity and analyst coverage over periods surrounding theseawards and by exploring a wider range of firm characteristics compared toexisting research.It is motivated by a seminal paper claiming that effective IR indirectly reduces thecost of equity capital, based a chain of existing research (Brennan andTamaronski, 2000). Firstly, effective IR increases analyst coverage by reducinganalysts' information-search costs, (Bhushan, 1989b, Lang and Lundholm, 1996,Francis, Hannah and Philbrick, 1997, Holland 1998b). Higher coverage candirectly reduce information asymmetry and trading costs, increasing liquidity andindirectly increasing equity trading volumes (Brennan and Subrahmanyan, 1996).Finally, Amihud, Mendelson and Lauterbach (1997) show a direct inverserelationship between stock liquidity and stock prices, thus completing the putativechain between effective IR and a reduced cost of equity.However, any research showing a direct relationship between effective IR andthe cost of capital is limited, with Botosan (1997) only finding a direct negativerelationship for a sample of US firms with effective annual reports and lowanalyst coverage, and more recent research by Botosan and Plumlee (2002)shows no relationship to firms' IR ratings from analysts of the Association ofInvestment Management and Research (AIMR).I find, firstly, that prior to the IR awards the smaller-sized firms earn excessequity returns and a positive relationship between the number of firms' IR awardnominations and prior analyst coverage. Secondly, I find that subsequent to theIR awards the firms continue to have high levels of analyst coverage, but do notearn excess stock returns. These findings suggest that analysts cover highmomentum small-firm stocks and generally follow firms with effective IR, and alsocontributes to other research on prior factors that appear to influence firms'ratings in subjective firm-surveys, which behavioural finance attributes to thesurvey respondents' psychological preferences and biases.Finally, I find that effective IR is associated with a subsequent significantincrease in stock liquidity and a reduced cost of equity, consistent withinformation risk and agency theories, which predict that effective IR will reducerisks attached to stocks due to high information asymmetry.
