ABSTRACT
This study models a firm’s investors as connected via a social network and examines how an appropriate investor relations (IR) strategy can maximize information flow through this network. When IR can initially reach only a few investors, information flows faster when IR targets highly connected investors through, for example, direct contact. When IR can initially reach many investors, information flows faster from untargeted broadcast-type communications that reach random investors. Turning to empirically measurable outcomes of information flow, we show that the time series of bid-ask spreads have a hump-shaped pattern, first increasing and then decreasing. Faster information flows cause a sharper, but briefer, bid-ask spread spike. Such results provide a rigorous framework for thinking about how IR activities drive stock liquidity, and unite several observed empirical regularities into an investor social network-based framework for IR activities, a research area where descriptive empirical findings have outpaced theory.
