Companies with a smaller market capitalization have a tougher time getting investors\u2019 attention, since they lack the communications muscle of bigger firms and don\u2019t get much coverage from analysts or the business press. So instead, as a new study reveals, they pick their shots to make the most of their limited resources, opportunistically utilizing conference calls, press releases and social media to get the word out about positive earnings.<\/p>\n\n\n\n
Based upon an interview with Andrei FILIP,<\/a> a Professor at I\u00c9SEG School of Management<\/a>, and his paper, \u201cGrabbing Investor Attention with Limited Resources: A Study of Small Cap Firms\u2019 Communication Channels,\u201d co-written with Romain Boulland of ESSEC Business School, Alessandro Ghio of Universite Laval and Luc Paugam of HEC Paris, published in European Accounting Review in August 2023.<\/em><\/p>\n\n\n\n Small cap firms can present a potentially lucrative opportunity for investors to make a bigger-than-usual return for their money, provided that they\u2019re willing to accept higher risk. The problem for those companies is that they tend to have a tougher time getting investors\u2019 attention, as I\u00c9SEG Professor Andrei FILIP explains.<\/p>\n\n\n\n \u201cThey\u2019re not large, famous firms that everybody\u2019s talking about, the ones that have unlimited resources to communicate with the world,\u201d FILIP says. <\/p><\/blockquote>\n\n\n\n When big-name companies have an earnings report to publicize, they can call upon armies of publicists to issue press releases, and then hold conference calls that have little trouble attracting analysts and business reporters. They can amplify those messages across social media as well.<\/p>\n\n\n\n Small-cap firms, in contrast, have a more difficult time affording the cost of investing in multiple communication channels, according to FILIP. So they have to be much more selective.<\/p>\n\n\n\n \u201cThese firms need to grab the investors\u2019 attention, because they don\u2019t have the same visibility as big firms that are covered by the news media,\u201d FILIP says. Additionally, the small firms don\u2019t have the luxury of having media specialists create a compelling story for them. Instead, \u201caccounting information is more relevant, because it\u2019s one of the main sources of information about what\u2019s happening in the company,\u201d FILIP says. \u201cIt\u2019s much more important, compared to big firms.\u201d<\/p><\/blockquote>\n\n\n\n In their study, FILIP and his colleagues focused on firms listed on the Alternative Investment Market (AIM), a part of the London Stock Exchange, over a five-year period between 2010 and 2015. At the end of that period, AIM included 1,044 micro to small cap firms, with an average market capitalization of 73 million British Pounds.<\/p>\n\n\n\n \u201cThe AIM represents one of the largest small cap markets in the world, making it a good setting to study the communication strategies of \ufb01rms with limited resources,\u201d the researchers wrote in the paper. AIM firms are followed, on average, by less than one analyst, and the exchange\u2019s \u201cWild West\u201d reputation creates a fertile ground for communication innovation.<\/p>\n\n\n\n The researchers focused on how firms publicized earnings announcements, which frequently affect stock prices because reported earnings are central to investors. <\/p>\n\n\n\n In the study, they asked three major questions. Do firms use the three communication channels (press release, conference call, social media)? (Yes, infrequently). Do they use all the channels opportunistically? (Yes.) Finally, is it working? i.e. do small cap firms attract the attention of the investors? (Yes.)<\/p>\n\n\n\n The study found that when it came to publicizing earnings, these firms use conference calls, press releases, and social media posts\u2014to a limited, infrequent extent. In the period 2010-2015, small cap firms held conference calls 10.1 percent of the time to promote earnings news, and issued press releases ahead of earnings announcements 13.9 percent of the time. In comparison, they issued an attention-grabbing tweet 4.7 percent of the time.<\/p>\n\n\n\n The study suggested that small cap firms use social media, and that it has some benefits for them. For cost-cautious companies, it provides a way to reach out for free. \u201cWith the appearance of platforms such as Twitter, Facebook and others, things have changed, because firms have a cheap way of communicating directly with investors,\u201d explains FILIP, intrigued by the question of whether the new platforms affect the way that companies communicate with investors.<\/p>\n\n\n\n Additionally, there are indications that a good Tweet or post on another platform can have an outsized impact.<\/p>\n\n\n\n \u201cWe notice that firms that use social media are having a higher number of Google searches,\u201d FILIP says. \u201cPeople are searching more for the name of the company, what the company is about. So I think it is working, in the sense that the small cap firms manage to grab investors attention.\u201d For small cap companies, who can\u2019t necessarily afford to hire an investor relations specialist to communicate with investors, it\u2019s a way of getting a result for less cost.<\/p><\/blockquote>\n\n\n Practical Applications:\u00a0<\/p>\r\n\t\t Companies can research on the impact of various communication channels, and incorporate that information into their investor communication strategy to make it more effective.<\/p>\n<\/div>\r\n<\/div>\n\nThe communication challenges of small cap firms<\/strong><\/h2>\n\n\n\n
In addition to traditional channels, small cap firms started using social media as an effective communication channel<\/strong><\/h2>\n\n\n\n
Why small cap firms used social media<\/strong><\/h2>\n\n\n\n