Articles reviewing IMF research on dollarization and on the relationship between macroeconomic policies and income distribution; country/area study: The Euro Area; summaries of Second Annual IMF Research Conference and Investor Relations Seminar; list of external publications of IMF staff; IMF working papers; visiting scholars at the IMF.
Summary by Ralph Chami
The IMF and the Institute of International Finance jointly hosted the first seminar on investor relations in Washington, DC, on November 5–6, 2001. The seminar, organized by the IMF Institute, brought together country officials and international lenders and investors. The participants examined the role that Investor Relations Programs (IRP) can play in sovereign borrowing and discussed the experience of countries with existing IRPs. Seminar participants, by and large, felt that IRPs had a positive impact on attracting foreign capital and lowering its cost, but cautioned against seeing them as substitutes for sound economic policies in debtor countries.
Investor Relations as a Tool of Crisis Prevention
Frank Savage (Savage Holdings LLC) and Robert Pozen (Fidelity Investments)
The Perspective of Investors and Lenders
Mohamed A. El-Erian (PIMCO), Douglas E. Smee (Citigroup, Inc.), and Amy Falls (Morgan Stanley)
Corporate Investor Relations Practices
Cees Maas (ING Group) and James R. Ryan (Lockheed Martin Corporation)
The Role of Investor Relations Programs in Recent Cases:
Brazil During the Argentine Crisis in 2001
Graham Stock (J. P. Morgan Chase & Co.), Thomas Trebat (Salomon Smith Barney), and Lorenzo L. Perez (IMF)
Arturo C. Porzecanski (ABN AMRO), Paulo C. Leme (Goldman Sachs), and Marcelo R. Figuerola (IMF)
Marco Annunziata (Deutsche Bank AG), David Lubin (HSBC), and Susan Schadler (IMF)
Investor Relations Practices by Leading Emerging Market Authorities
Rodrigo Brand (Ministry of Finance and Public Credit, Mexico), Dong-Kyu Shin (Ministry of Finance and Economy, Korea), Jacek Tomorowicz (Ministry of Finance, Poland), and Lambertus van Zyl (South African Reserve Bank)
“Best Practice” for Investor Relations
George Handjinicolaou (Merrill Lynch & Co., Inc.), Klaus Friedrich (Dresdner Bank AG), and William Streeter (Fitch Ratings, Ltd.)
Anne Krueger and Charles Dallara welcomed the participants and asked them to examine the ways in which a frank, meaningful, and sustained dialogue between country authorities and international lenders could contribute to stabilizing and lowering the risks associated with cross-border flows of private capital.
The idea of having an IRP has its roots in modern corporate finance theory. With its emphasis on maximizing shareholder value, the theory recognizes the crucial role information asymmetry, and attendant incentive problems of moral hazard and adverse selection, play in determining the capital structure of a corporation.1 Equity financing, being an unsecured form of lending, is very susceptible to informational problems. As a consequence, historically the debt contract has been preferred by lenders.2 Academics and practitioners alike have realized the importance of reducing informational asymmetries for ameliorating the agency problem, and the perception of risk by outside investors.3 Such information provision has been pivotal for the development of equity markets and, as a consequence, has allowed firms to reduce their reliance on debt and internal funding as the main sources of finance.4
Corporations in the United States have long recognized the importance of providing stakeholders with relevant and timely information and their investor relations offices (IROs) assist stakeholders in differentiating among investment choices.5 The information exchange between borrowers and lenders has been given considerable structure and substance through financial disclosure regulations (which, in the United States, are formulated by the Securities and Exchange Commission).
What is an IRO? At the corporate level, an IRO is the main link between a firm and its stakeholders. Such an office also benefits other observers such as ratings agencies and analysts. The office is charged with maintaining regular contact with market participants, providing them with timely and reliable financial data, and conveying to the market the management’s vision and philosophy. This helps in differentiating the firm from its competitors, and contributes to enhancing its brand name. An IRO also serves the equally important role of conveying to management the markets’ assessment of the firm’s actions and future prospects. Seminar participants from the corporate sector stressed that an IRP represents goo risk management practice, in that it helps foster a culture of accountability within the firm.
A country’s IRO can be located either within the central bank or the ministry of finance. A sovereign IRO’s credibility depends on its ability to provide the market with timely and reliable data, realistic assessments of policies, and discussion of a believable forward-looking strategy. An IRP not only allows officials to communicate with investors, but also provides invaluable feedback from the market to country officials regarding the market’s perception of policies. It should provide an open and candid line of communication not only in normal periods, but also during times of stress.
As emphasized by seminar participants, the credibility of an IRP depends crucially on the reputation and experience of those in charge of the IRO. The senior officials in the IRO should be able to moderate effectively the needs and concerns of lenders to key officials and organizations. At the same time, they should also help foster a country strategy for dealing with market players and communicate effectively the views and concerns of policymakers to domestic and international markets.
The credibility of an IRP is enhanced by providing similar information to all stakeholders (domestic and foreign), avoiding rosy forecasts, and disclosing contingent liabilities. If a problem exists, the IRO should alert investors of the potential for bad news, but place it in the proper context by conveying to markets that officials not only understand the nature of the problem, but have also developed strategies for dealing with it. Representatives from large investment banks emphasized the importance of low turnover among IRO staff for developing and maintaining the trust of market players.
Brazil and Mexico were cited as examples of successful IRPs that had helped “decouple” the countries from others in the region. The benefits of differentiation had included lower interest rate spreads for sovereign debt, and a wider set of financing options. Participants mentioned Turkey as a case where the absence of an effective IRP had hindered the country from benefiting from much needed private capital flows, despite serious attempts at dealing with its financial problems. In his concluding remarks, Gerd Häusler stressed that an IRP is neither a panacea nor a substitute for sound macroeconomic management—a view shared by all participants and, some felt, illustrated by the Argentine case.
See Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior,” in Agency Costs and Ownership Structure, International Library of Critical Writings in Economics, Vol. 106 (Cheltenham, U.K. and Northampton, Mass.: Elgar, 1999).
See Franklin Allen and Douglas Gale, Comparing Financial Systems (Cambridge, Mass: MIT Press, 2000).
See Jonathan Barron Baskin and Paul J. Miranti, Jr., A History of Corporate Finance (Cambridge, UK: Cambridge University Press, 1997).
See John Riley, “Silver Signals: Twenty-Five Years of Screening and Signaling,” Journal of Economic Literature, Vol. 39, 2001, pp. 432–78.
See, for example, the IRO web sites for Lockheed Martin and ING: http://www.lockheedmartin.com/investor/ and http://www.ing.com/ing/contentm.nsf/homeinvestors!ReadForm&sc=investors&lan=en.
Visiting Scholars at the IMF, October–December 2001
Michael Bleaney; University of Nottingham, U.K.
Michael Bordo; Rutgers University
John Boyd; University of Minnesota
Kevin Carey; American University
Menzie Chinn; University of California, Santa Cruz
Carl Claussen; Central Bank of Norway
Giancarlo Corsetti; University of Rome III, Italy
Thomas Cosimano; University of Notre Dame
Allan Drazen; University of Maryland
Jayasri Dutta; University of Birmingham
Michael Funke; Universitat Hamburg, Germany
Pietro Garibaldi; Universita Commerciale Luigi Bocconi, Italy
Morris Goldstein; Institute for International Economics
Cheikh Gueye; BCEAO, Senegal
Gregory Hess; Oberlin College
Shigeru Iwata; University of Kansas
Mahmood Khan; Simon Fraser University
Amartya Lahiri; University of California at Los Angeles
Francois Leroux; Ecole des Hautes Etudes Commerciales, France
George Mbangah; University of Yaounde II, Cameroon
Emmanuel Ogunkola; National University of Lesotho, Lesotho
Andrew Rose; University of California, Berkeley
Xavier Sala-I-Martin; Universitat Pompeu Fabra, Spain
Fondoh Sikod; University of Yaounde II, Cameroon
Mark Taylor; Warwick Business School, U.K.
Juergen von Hagen; University of Bonn, Germany
Thomas Willett; Claremont Graduate University
Yishay Yafeh; The Hebrew University, Israel
Eduardo Yeyati; Torquato di Tella University, Argentina