The passage of the Sarbanes-Oxley Act turned the world of publicly-traded companies in the United States upside down. A lot has been written about the increased compliance and reporting costs that smaller businesses now face.
There’s another aspect to Sarbanes-Oxley. Small-cap publicly-traded companies in the United States are having a harder time getting analyst coverage. They are turning to skilled investor relations (IR) consultants to raise their visibility — without running afoul of the law.
A Knowledge@Wharton article (requires free registration) documents the work of two professors who have studied investor relations activities. Small- and mid-capitalization companies typically traded on the NASDAQ and OTC markets are now hiring investor relations consultants out of necessity, in order to get the visibility with analysts that they once had:
“Analysts at Wall Street brokerage firms who once tracked small companies in hopes of attracting investment banking business cannot do that anymore for fear of raising conflict of interest questions. Companies in turn cannot favor selected analysts in releasing corporate information. The end result is that smaller companies are having a harder time gaining analysts’ attention.
All this has heightened the importance of IR professionals to companies that are seeking to be heard by investors over the crowd of other such companies also clamoring to be heard.”
The Knowledge@Wharton article is worth reading. While I haven’t seen the underlying academic study, the article seems to suggest that demand for Investor Relations consulting is growing because of the needs of publicly-traded small-cap companies in the current regulatory environment.