(Public relations science, or measurement, is expanding today at a furious clip as PR executives jockey to put some benchmarks on their campaigns to which the boss can
relate. This new column will be a regular feature of PR News, designed to alert you to important research-based knowledge and to shape your own thinking and creativity.)
Investor Communications and Wave Theory: The theory that stock prices move in waves reflecting investor psychology is well-known in financial markets. Any broad,
upward movement generally consists of five wave-like motions - three up, two down. The first upward motion occurs when a small number of risk-tolerant investors believe a stock
has bottomed out, but when these early investors get nervous and take profits, the price moves down - wave two. If the stock stays above previous lows, another group of investors
- often institutions - sense a buying opportunity, which creates the third wave up. When this advance takes a breather, there is consolidation as wave four brings the stock down
to where it looks relatively inexpensive again. Then comes the wave five, when many individual investors jump in.
The sustainability of this rally is an important determinant of long-term share value, and it is largely dependent on retail investor confidence. Dr. Ernest Martin of
Virginia Commonwealth University has researched whether increased news presence during this period helps sustain investor confidence and, therefore, the stock price. In
fact, the research strongly supports that hypothesis (see chart).
While most investor-relations programs are aimed primarily at institutions, Martin's findings provide a strong argument for effectively communicating company news to retail
investors. His analysis suggests that the retail-investor wave can last five times longer with heavier media coverage. Thus, timing media activity with retail-investor patterns
can play an important role in supporting long-term stock prices and shareowner value.
Dr. Martin's paper and other current research works are available free at http://www.instituteforpr.com.
Contact: Frank Ovaitt, [email protected]