F

irms have historically recognized the importance of

sell-side financial analysts, who differ from those on
the buy side. Sell-side analysts work for brokerage
houses and investment banks, issuing earnings estimates
and generating recommendations for the buying or selling
of a firms equity. Buy-side analysts, on the other hand,
manage investment portfolios. They do not follow spe-
cific stocks and do not sell information.
The information that analysts provide to investors affects
firms most directly at two levels. First, changes in earnings
estimates and recommendations ultimately affect market
valuations, which in turn affect a firms ability to raise capi-
tal, its compensation policies, and its future acquisition
strategies. Second, recommendations and comments mate-
rially affect a firms reputation in the business community.
Analysts have always had an important behind-the-scenes
role in making or breaking reputations. They can, for exam-
ple, serve as respondents in Fortune magazines annual cor-
porate reputation survey, which identifies Americas Most
Admired Corporations. More recently, they have taken on
a more public role, with personalities such as Abbey Joseph
Cohen and Ralph Acampora gaining celebrity-like status by
appearing on television, most prominently CNNs Money-
line and the CNBC financial network. By influencing repu-
tation, analysts affect a firms ability to raise capital, attract
better employees, and charge premium prices for its prod-
ucts and services.
Because of such growing influence and visibility, a firm
must communicate its strategies to sell-side financial ana-
lysts if it wants to implement them effectively. Most firms
communicate with analysts and other investors regularly as
part of their investor relations (IR) programs. According to
Petersen and Martin (1997), only a minority of firms have
a separate IR department; however, every firm has someone
responsible for investor relations. In smaller firms, the CEO
or CFO may be solely responsible for it.
So what is the relationship that exists between firms and
analysts? What communication topics and issues must man-
agers address as part of their IR process if they are to com-
municate strategy most effectively with financial analysts?
Sell-side financial analysts are
important to a firm because
they affect both investor behavior
and the firms reputation in the
business community. Given such
importance, it should be clear that the
effective implementation of strategy also
requires that the firm effectively communicate
with these analysts regarding its strategy. Here,
the focus is on the relationship that exists
between companies and analysts, as well as its
implications, from a communication strategy
standpoint, for companies investor relations
activities.
11
Jerome C. Kuperman
Assistant Professor of Management, Minnesota State
University Moorhead
Communicating strategy
to financial analysts
To discuss these questions, we rely here not only on the lit-
erature but also on analyst comments from interviews. Data
were gathered as part of a larger research project focused on
analyst reactions to acquisition announcements by firms. So
the comments used here as illustrations of a more generally
applicable concept will sometimes specifically refer to acqui-
sition situations. The nine analysts quoted (see Table 1)
came from two very different types of industries: computer
software (a high-discretion industry) and steel (a low-discre-
tion industry). The former has fewer constraints than the lat-
ter and thus allows managers more discretion in formulat-
ing and implementing new strategies. Interviews were con-
ducted as open-ended conversations, and although guided
by an interview protocol, analysts were encouraged to com-
ment freely and openly. Findings fit into three different
communication topics: content, delivery process, and the
general importance of managing the company/analyst rela-
tionship. Figure 1 summarizes these topics and issues and
their implications for the IR activities of firms following
strategic announcements.
Creating and focusing
communication content
A
variety of issues pertain to the content of commu-
nications between managers and analysts, includ-
ing finding the appropriate level of disclosure,
providing quantitative data, and providing qualitative
information that supports the strategy. All center around
the basic question of how to focus communications with
analysts and what information to include.
Finding the appropriate level of disclosure
In fundamental valuation analysis, analysts examine such
factors as macroeconomic influences, industry effects, and
company information with the intent of constructing finan-
cial models to determine a firms intrinsic value. They need
a variety of quantitative data and qualitative information to
run their financial models, and they depend heavily on
firms for most of their information.
A natural tension exists between a firms desire to provide
analysts with full information and the need to be careful
about its level of disclosure. Although analysts tend to want
more disclosure than firms often provide, the firms are re-
luctant to disclose forward-looking information for several
reasons. First, they fear leaking information to competitors.
Second, firms use corporate communications to signal to
other firms in their competitive environment, and commu-
nications intended for analysts may interfere with this sig-
naling process. As an example, Heil and Robertson (1991)
have shown how oligopolists coordinate pricing activities
by signaling their intentions to each other about price
changes and possible retaliation through corporate com-
munications. Third, firms must be careful not to provide
stockholders with ammunition for lawsuits. Skinner (1997)
discusses the possibility of such lawsuits if a firm is deemed
by some shareholders to have misled the market through
optimistic disclosures. By being more pessimistic or not
disclosing at all, the firm can protect itself from litigation.
Providing quantitative data
Historical data are not usually an issue because firms are
mandated by law to provide such data in their accounting
statements. However, a firm has much more discretion in
terms of forward-looking information. In the case of quanti-
tative data, analysts are generally concerned most about
firms disclosing forward-looking information that can help
them understand the impact a new strategic choice will have
on earnings statements, cash flows, and balance sheets.
Providing qualitative information
Besides numerical data for financial models, firms also give
analysts qualitative input. As to IR activities, Mahoney
(1991) observes that firms need to contribute beyond the
basics, giving some meaningful amplification and interpre-
tation. Major strategic shifts represent ambiguous situa-
tions open to potentially multiple interpretations; by pro-
viding qualitative information, a firm tries to help give the
observer (the analyst) a specific interpretation. Gioia and
Chittipeddi (1991) have called this a sensegiving process,
whereby firms are attempting to provide interpretation and
explanationor, as Weick (1995) puts it, allocate meaning
to new information.
There is always a need for firms to communicate situa-
tion-specific and/or industry-specific qualitative rationales
to analysts. At times, managers and analysts have similar
interpretations and the job of sensegiving is easy. At
other times, however, the two may not be in sync. This is
when it becomes much more critical for firms to be care-
ful in managing the process. Of course, although I focus
here on the analyst community as a group of like-minded
individuals, it is also important to remember that qualita-
12 Business Horizons / September-October 2002
Table 1
Analysts interviewed
Analyst Seniority Industry
#1 Senior Steel
#2 Senior Steel
#3 Associate Steel and Software
#4 Senior Software
#5 Associate Software
#6 Associate Software
#7 Senior Steel
#8 Senior Software
#9 Senior Steel
tive information also allows for individual interpretations
that can vary among analysts. Effective communication
strategy must recognize both levels.
G Situation-specific rationales and implementation
timetables
Analysts look for a firms rationale behind a strategic deci-
sion as well as information on its plans for implementing
it. In the context of acquisitions, analysts constantly spoke
of the need for firms to discuss such things as the value
added of the acquisition, the firms strategic rationale,
and the expected synergies. Analyst #8 noted that there
is a problem if you come away from the conference call
and dont really have a strong feeling of the strategic
objective being achieved by this acquisition. Moreover,
analysts are very concerned about managements strategic
planning abilities. Four of them discussed the importance
of the firm being able to present, as Analyst #9 stated, a
13 Communicating strategy to financial analysts
Figure 1
Summary of key points
TOPIC COMMUNICATION ISSUE
Creating and focusing Finding the appropriate level
communication of disclosure
content
Providing quantitative data
Providing qualitative information
situation-specific rationales
Providing qualitative information
industry-focused rationales
Process delivery Identifying which company reps
issues should be involved
Targeting analysts as a
communication strategy
Managing the Building trust and credibility
relationship
Leveraging resources
RECOMMENDATIONS FOR IR STRATEGY
Balance the desire for full disclosure with several risks associ-
ated with excessive disclosure.
Focus on forward-looking information.
Provide qualitative interpretation to help firms understand
the rationale behind the strategy.
Show analysts a plan and vision for the future.
Present a time frame for future implementation activities.
Where possible, discuss prior strategic successes and similari-
ties between those situations and this situation.
Tell analysts why this strategy makes sense from an industry
perspective. Analysts are part of the industry they observe and
on which they report.
Accepted industry rationales vary with the industry, so focus
the information correctly.
If the firms rationale is different from the industrys collec-
tive understanding, provide interpretation that helps the ana-
lyst understand your logic in terms of industry dynamics.
Different analysts have varied expectations of which company
reps are able to deliver different messages, so choose the ap-
propriate messenger for each specific strategic situation and
each individual analyst.
Some analysts are more successful within the profession than
are others, so focus IR activities on opinion leaders and
thereby maximize your IR returns.
Be mindful of interpersonal relationships between company
reps and analysts that have evolved over many years.
Be consistent in disclosure patterns over time so as not to
make analysts question why this situation appears different
from past situations.
Follow through on commitments so as not to make the ana-
lyst question the credibility of your statements.
Firms have historically used their control over resources such
as information and investment banking business opportuni-
ties as tools to influence analysts short-term behavior. This
has long-term relationship risks, with ethical implications
that make it a questionable or even undesirable strategy.
time frame of what they are going to do as they move
through the value creation process following an acquisi-
tion. As Analyst #5 stated:
You want the company to have a clear idea of how
they plan to integrate and how they plan to pro-
gress with the new acquisition. Analysts want a
roadmap, kind of a set of milestones that you can
look for over the coming months and say, alright,
theyre tracking the plan or theyre behind plan.
That same analyst discussed the specific case of a software
firm whose rationale for an acquisition was that it would
create value by linking the firms superior management and
sales force with the acquired companys product. This meant
planning for the layoff of the acquired firms top manage-
ment as well as preparing their sales force and the customers
of both companies for the change. The firm was prepared
with a detailed plan and forthright with analysts about the
layoffs. Analyst #2 recounted an example of another firm
that specifically stated expected synergies for all its product
segments and presented a plan to reach those targets.
When discussing rationale, firms must be aware of history
and their prior experiences with the strategy being imple-
mented. If there is a relevant history and analysts have had
experience with the firm in the context of the strategy in
question, this knowledge can influence their assessment. As
Analyst #8 noted, You know what their strategy is ahead of
time and it makes sense to you because youve been think-
ing like theyre thinking. You know what theyre about.
Analyst #6 used the example of a well-known software firm
and its strategy of acquiring companies that are in trouble,
are undervalued, and have products with a large installed
base. The firm keeps the product and its maintenance rev-
enue but discards everything else. This normally means
work force reductions, including the elimination of top
management positions. Analyst #6 noted that as long as the
firm continues to make acquisitions in this mold, its capa-
bilities in implementing such a strategy should foster con-
tinued analyst support in future acquisitions. On the other
hand, said Analyst #9, If youve been working with a firm
thats made a series of acquisitions in the past that havent
worked out, and they make a new one, your tendency is to
believe theyre going to screw this one up as well.
In summary, firms must communicate a rationale for any
strategic choice they make, provide a plan for its implemen-
tation, and construct a timetable for its completion. In terms
of an appropriate rationale, firms must recognize that ana-
lysts potentially may have incorporated expectations based
on historical patterns. The rationale given by firms to sup-
port a strategic decision should connect with these expecta-
tions by showing, wherever possible, how the decision is not
only situationally sensible but also how it fits with prior his-
torical patterns. When there is a history that supports the
firms ability to implement the strategy in this situation, the
firm can simply point to it in discussing its rationale and
expect support from analysts. However, when the firm either
has a history that is situationally relevant and its rationale is
inconsistent with those historical patterns, or it has been un-
successful in the past in implementing this strategy, it must
take extra care to manage the sensegiving process by pro-
viding analysts with a reasonable interpretation they can
learn to embrace.
G Industry-focused rationales
Individual analysts are normally responsible for reporting
on industries, so they have specific knowledge of not only
the firm but also its competitive industry environment.
Spender (1989) has discussed industry recipes, noting
that executives adopt a way of looking at their situations
that are widely shared within their industries. Similarly,
Prahalad and Bettis (1986) pointed to the existence of an
industry dominant logic. Essentially, a collective under-
standing of strategy exists within industries that provides
a context within which firms make their strategic choices.
As dedicated industry observers, analysts perceive many of
the same issues as the managers of the firms they observe.
Analyst #5 remarked:
[Analysts] understand the various industry dynam-
ics. Typically, when a firm makes an acquisition of
any reasonable size, youre pretty much going to
understand what their motivations are for doing
that, or at least have some preliminary intuitive
assumption about what their objectives might be.
The following comment drawn from Haspeslagh and Jemi-
son (1991) serves as an example of industry-level collec-
tive understanding in the context of M&A activity:
Often, however, industry restructuring is fast-paced,
as industry after industry goes through a window of
strategic change.In the face of such pressures for
rapid industry restructuring, an increasing number
of companies have embraced rapid acquisitive de-
velopment to leapfrog their competitors in this
process or catch up with early leaders. These strate-
gic assemblers, as we will call them, attempt to put
a significant industry position together through
multiple acquisitions.
Haspeslagh and Jemison have determined that many indus-
tries offer structural opportunities for firms to become
strategic assemblers. In such an industry context, analysts
possessing a similar understanding would be expected to
respond favorably to the strategic assembler rationale fol-
lowing an acquisition decision.
For the computer software and steel industries studied
here, there appeared to be a significant difference between
the collective understanding of the analysts in each indus-
try when it came to acquisitions. Software analysts dis-
cussed acquisition rationales primarily in terms of prod-
uct synergies and product integration issues. Analyst #4
14 Business Horizons / September-October 2002
put it succinctly: Its primarily product in my world. How
do these different software packages interface with each
other? Analyst #6 explained the software industry ration-
ale behind acquisition activity:
If Technology Company A buys Technology Com-
pany B to either complement its technology or
expand its market share, the technologies have to
be compatible or similar; and if its to expand mar-
ket share, there has to be some overlap.[I]f you
got down to the very granular level, the code
streams would have to merge; the products would
have to integrate seamlessly in an ideal situation.
In the steel industry, issues seem to be entirely different.
The concern is much more with tangible assets. Steel
industry analysts discussed such issues as restructuring
charges, inventory write-downs, and union labor agree-
ments. Analyst #2 raised issues that included shipment
records and plant capacity, and discussed the logic of
mergers and acquisitions:
Theres a lot of legacy liabilities in these companies
and the track record of mergers has been pretty
lousy.So a lot of these guys are understandably
gun-shy about putting them together. But I think it
is becoming compelling to grow a lot of these com-
panies. They should not be adding capacity; God
knows theres enough capacity. Its a way to lower
costs, lowering of SG&A, operational synergies, and
even financial synergies.
Analyst #3 provided the following account of key issues in
the steel industry:
In steel, look at the impact on financials. Are they
going to take a lot of restructuring charges? If they
do, whats the impact on cash? Are there going to
be a lot of inventory writedowns? Are there going
to be funds set aside for terminations and that kind
of thing that are definitely cash-flow negative? How
long is the integration going to take place? Is there
any technology sharing, or are they just doing this
to leverage their positions against unions?
Finally, Analysts #7 and #9 both discussed a recent acqui-
sition in which synergies included restructuring the ac-
quired companys debt and combining an underfunded
pension plan with an overfunded one.
When firms make a strategic decision, they must under-
stand that analysts too understand industry dynamics,
and that this collective understanding promotes and lends
instant legitimacy to specific strategic rationales. If a firm
can use one of these rationales, it is likely to be very posi-
tively received by analysts. However, if the firm cannot use
existing rationales to support its choices, then it needs to
manage the sensegiving process by presenting an alter-
native rationale that analysts can reasonably accept.
Process delivery issues
T
he issues involved with the delivery process in-
clude identifying which of the firms representa-
tives should be involved in the communication
process and determining, as a communication strategy,
whether particular analysts should be targeted for more
attention during the communication process.
Identifying company representatives
In terms of who should be communicating with analysts,
social psychology researchers Fiske and Taylor (1991) and
Lord and Foti (1986) have done substantial work on the
topic of role schemas. Role schemas contain expectations of
the appropriate and likely behaviors of people holding par-
ticular social positions. For instance, we all recognize the
role of a waiter in a restaurant. Analysts interact most often
with two types of people in a firm: IR representatives and
top management. They have expectations in the form of
role schemas about the types of information normally
communicated by different representatives.
Analysts generally agreed in interviews that their best infor-
mation comes from a firms top management. Their com-
ments indicate a clear role schema in which the IR repre-
sentative provides routine information. Analyst #6 por-
trayed the IR spokesman as someone who goes around
shaking hands.Nobody wants to talk to [IR].Hes the
guy who thinks hes really important but doesnt know the
answer. In a similar vein, Analyst #5 remarked:
IR people tend to be conduits as opposed to key
people. They do often get involved in the sense that
they like to participate. But when it comes down to
make-or-break-it information, theyre never the
people were aiming to speak to.
Analyst #9 expressed a concern that some IR representa-
tives think they are more capable than their own manage-
ment in speaking with analysts. If management is not that
comfortable [talking to the street] and delegates a lot of
the responsibility to an IR person, then that can cause a lot
of problems sometimes, said the analyst. The worst thing
is an IR person who tries to do the whole IR job himself or
herself and not allow management to talk that much.
Some of the analysts, while recognizing IR as the source
of routine information, also acknowledged that IR repre-
sentatives at times provide other more critical and com-
plex information. Analyst #3 observed that where the IR
guy fits into that whole picture differs between compa-
nies, because an IR person can be a guy who goes around
shaking hands or it can be someone with very high-level
information. Analyst #7 drew an interesting analogy by
noting that in some companies the IR representative is
clued into senior management much the same way the
Presidents press secretary is clued into the White House.
15 Communicating strategy to financial analysts
Interviews support the role schema theory that analysts
expect certain types of information to be presented by top
management. In more routine situations with some ana-
lysts, a lower-level IR person is an acceptable source. Firms
need to be aware of the situation and the individual ana-
lysts expectations when selecting the messenger.
Targeting analysts as a communication
strategy
Targeting specific analysts as part of a communication
strategy only makes sense if we believe that not all ana-
lysts are equal. And there is evidence that this assumption
is, in fact, valid. Analysts are compensated in part based
on their performance compared to other analysts in terms
of the ability to generate quality recommendations and
accurate earnings estimates. Institutional Investor maga-
zines list of All-American Analysts and Zacks Investment
Research list of All-Star Analysts are examples of relevant
comparative rankings. The tendency for analysts to com-
pare themselves with one another can lead to herding
behavior. This is because analysts have an incentive not to
be wrong vis--vis other analysts. As an example of herd-
ing, Scharfstein and Stein (1990) point to the pre-October
1987 bull market:
The consensus among professional money man-
agers was that price levels were too highthe mar-
ket was, in their opinion, more likely to go down
rather than up. However, few money managers
were eager to sell their equity holdings. If the mar-
ket did continue to go up, they were afraid of being
perceived as lone fools for missing out on the ride.
On the other hand, in the more likely event of a
market decline, there would be comfort in num-
bershow bad could they look if everybody else
had suffered the same fate?
While an executive vice president at Lehman Brothers,
Stephen J. Balog (1991) similarly observed, The analyst
doesnt want to be the last person to discover something.
Its okay to be embarrassed along with everybody else
just dont be singularly embarrassed.
While most analysts follow a herd, some must inevitably
lead it. OBrien (1990) has suggested that the herd contains
followers who mimic recognized leaders to produce move-
ment over time in the consensus estimate. Stickel (1995)
lends support to such a conclusion. In studying Institutional
Investor magazines All-American Research Team of superior
performers, he found that the impact of these analysts rec-
ommendations was significantly more influential in mov-
ing markets than recommendations by non All-Americans.
Thus, a key strategy for firms might be to focus communi-
cation efforts on opinion leaders among analysts.
Managing the relationship
T
his final section focuses on the general importance
of managing a firms interactions with analysts. In
the context of a long-term relationship, specific
issues include how to build trust, maintain credibility,
and leverage resources.
Building trust and credibility
Analysts and company representatives interact often. Man-
agers depend on the analysts for coverage and positive
assessments, while the analysts depend on the managers
for most of their information. Almost 60 percent of ana-
lysts surveyed by Eccles and Mavrinac (1995) reported
speaking or meeting with company representatives at least
several times a week. Analyst #5 estimated that for any
company youre covering, youre speaking to management
at least once a month. They know you. You know them.
Given this context of repeated interactions, analysts often
form very personalized relationships with their contacts.
As Analyst #7 said, One develops this feel of whom to
rely on from management by the day-to-day business of
investor relations work over earnings and earnings esti-
mates. Analyst #2 commented, I do know these people
and I guess the one-on-one part is probably the most
important part of it because, in theory, you can ask ques-
tions and the management can feel free to answer them.
Analysts interact often with the top management of every
firm they cover. Surveys by both Pincus (1986) and Hig-
gins and Diffenbach (1985) showed that analysts evalua-
tions of firms are largely affected by their observations of
the firms management quality. Pincus noted that
over 42 percent responded that their personal eval-
uation of top management is worth 60 percent of
their total evaluation of the companys price/earn-
ings multiple. Another 34 percent said that per-
sonal appraisal of management is worth more than
one-third of the total evaluation.
In firms that also have dedicated IR departments, these
personnel have one primary job. In a survey conducted by
Petersen and Martin, a majority of CEOs identified meet-
ing one on one with analysts, brokers, and investors as the
most important job function of the IR representative. For
evidence of how personalized the relationship between
analysts and the firms IR rep can become, one need look
no further than Institutional Investor magazine and two of
its annual surveys. One survey asks IR directors to list their
favorite analysts. The other asks analysts to identify their
favorite IR officers. The following two comments (Lowen-
gard 1995) are examples of how two analysts described
their favorite IR representatives.
16 Business Horizons / September-October 2002
He was not just an IR guyhe was a grand strate-
gist, an advisor on value to the company. Adds
another admirer: He always endeavored to be ab-
solutely honest. And no matter what, he was always
there. A third analyst marvels that Andy knew
what he wanted us to know before we knew it.
[He] is more knowledgeable about the books than
many CFOs in this industry. Appends a con-
stituent: Hes a real straight shooter. He tells you
when things are disappointing and has never done
anything to cause me to change my expectations.
The quality of relationship that evolves through years of
contact between analysts and company representatives is
crucial. How analysts interpret every communication is af-
fected by how they view the relationship. Credibility is
critical if firms are to gain any benefit from IR activities.
During interviews, analysts focused on two key variables
that they use in determining credibility. First is the issue
of disclosure patterns. Analysts were very explicit in indi-
cating that they are familiar with individual companies
and their disclosure patterns. Analyst #5 stated, We have
companies that we trust a lot and we have companies that
we dont. Really, what kind of defines that besides your
gut feel, its basically managements consistency. Firms
that are inconsistent in their disclosures run the risk of
losing credibility in the eyes of analysts. There are certain
figures that companies historically dont give you, and
each company varies, observed Analyst #5. So in that
sense, if they have a precedent of not telling you, then its
a lot easier to accept.If they are reporting it, and then
they dont report it, thats a problem. As another exam-
ple, Analyst #3 noted:
If youre talking to a guy who ordinarily gives you
reams of information every time you call him and
then suddenly he doesnt want to tell you any-
thing, thats a flag. If somebody never gives out any
information and historically has been like that but
hasnt really surprised either way on their earnings,
then its no big deal.
If consistency in reporting does not exist, analysts dont
know what to expect and can become confused by repre-
sentatives comments. Analyst #9 provided an example of
just such confusion in the case of a firm that replaced its
CEO with someone more aggressive:
[The former CEO] was very conservative and always
gave you a number he thought he could beat. And
the street was conditioned to that type of view-
point. Then a new CEO came in and he was very
good, but a lot more aggressive in what he thought
he could do.[T]hen the street, which had been
conditioned to expect 20 percent more than they
had been told, all of a sudden theyre seeing 10 per-
cent lessand theyre all confused.
Thus, regardless of disclosure level, firms must maintain
consistency in their reporting over time.
The importance of performance track record is the second
variable analysts use in determining credibility. Company
representatives that do not follow through on their prom-
ises run the risk of losing credibility. Analyst #2 spoke of a
company that quarter after quarter after quarter will fore-
cast good earnings and then miss the forecast. Because of
such a poor track record, this analyst takes comments with
a certain incredulity. On the other hand, as Analyst #2
indicates, firms with a good track record benefit:
If theres a company that has a good track record of
being realistic and [management] asks me to take
something more on faith and has a fairly decent
reason for not wanting to disclose something, Im
obviously going to be more apt to take it on faith
than in the case of a management with a crappy
track record.
Analyst #7 made a similar statement: If one feels that the
management has historically been doing a good job, one
tends to give them the benefit of the doubt. Analyst #8
summed it up by saying, You want managers who are
reliable and do, or at least attempt to do, what they say
theyre going to do.
When communicating with analysts about any strategic
issue, it is important to remain aware of the relationship
context. Analysts interpretations are affected by relation-
ships and firms must always be managing their communi-
cations so as to maintain credibility. This means being
consistent in reporting patterns following strategic an-
nouncements and being careful to provide realistic guid-
ance to which the firm can comfortably track.
Leveraging resources
Companies have two primary resources representing
important leverage points in their interactions with ana-
lysts. First, they control important information. Analysts
commented that firms do indeed treat them differently
from one another, and that this variation in treatment can
affect information flow. Analyst #5 discussed how firms
return telephone calls usually in the order received.
Sometimes theyll be more favorable and it just depends
on whom they want to talk to first. You know, like who
they feel gives the story more color. Analyst #6 observed
that firms will be more cooperative if they have a certain
amount of respect for your professional ability to do your
job as an analyst.
Second, firms also need investment bankers, and analysts
working for firms with an investment banking (IB) busi-
ness are rewarded financially for generating such business.
Two former Donaldson, Lufkin & Jenrette (DLJ) invest-
ment bankers, John Rolfe and Peter Troob (2000), ob-
served that during the underwriting process, bankers and
17 Communicating strategy to financial analysts
analysts spend a lot of time working closely with each
other. They work out the details of a companys valuation
and debate what approaches should be used to position
and market the company to prospective buyers. Thus, it is
not entirely surprising that Dorfman (1995) and Hayward
and Boeker (1998) have found evidence to suggest that
analysts respond differently when there is an IB relation-
ship.
Fox (1997) and Schipper (1991) speculate that analysts
who fear retaliation from firms in the form of less informa-
tion disclosure and/or the loss of IB business might be less
likely to release negative comments or downgrades. This
potential conflict of interest is an important topic, given the
recent scandals at Enron and WorldCom. Changes in ana-
lysts incentive programs are occurring as this article goes to
print, and the ability of firms to leverage IB resources is
clearly being reduced. This article is not advocating that
firms ever use this strategy because it clearly puts long-term
relationships at risk. Nevertheless, this strategy can be used
and has been used in the past.
F
inancial analysts are indeed important to a firm,
with considerable influence on both investor be-
havior and the firms reputation in the business
community. Thus, they ultimately affect its long-term abil-
ity to successfully implement strategy. For this reason,
executives must carefully consider all the issues discussed
here as they manage their investor relations activities and
nurture their relationships with analysts.
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18 Business Horizons / September-October 2002