Who Hires Investor Relations Firms? The Role of Managerial Entrenchment

This paper investigates the role of managerial entrenchment in the decision to hire an investor relations specialist. Managers of small and mid-cap firms spend considerable resources on hiring investor relations (IR) firms. This paper proposes a hypothesis to explain this spending. We argue that more entrenched managers are less likely to hire IR firms, because such managers are less likely to have their compensation tied to stock returns and be more wary of outside attention from the market. Using a common definition of managerial entrenchment, we show that entrenched managers are indeed less likely to hire an IR firm. We also examine the relationship between the method of payment of the IR firm (cash or stock) and future performance of the client. If an IR firm is paid in stock, it has an incentive to expend more effort on its client’s behalf, thus leading to increased client performance. Our evidence shows that there is indeed a positive relationship between payment in stock and future client performance.