A new study reveals that the size of the gap between a company’s fundamental value and its market valuation is significantly affected by the degree of alignment between a company’s economic performance and the specific goals and preferences of its investor base.

The results of the joint study by Thomson Financial and The Boston Consulting Group were announced today.

“Our research identified valuation gaps of as much as 30% to 50%,” said Ari Axelrod, the BCG manager who headed the research project, in a news release. “CEOs cannot afford to leave these gaps unmanaged. Since investors are the buyers of a company’s ultimate product — equity — companies need to apply the same principles to their investors that they use when marketing their products and services: segmentation, customer knowledge, product alignment, branding.”

Different types of investors value different types of performance. A company action that may be fundamentally sound from a long-term perspective may nonetheless disappoint its dominant investors if it does not meet their specific screening criteria. In these circumstances, dominant investors are likely to sell, creating imbalance between supply and demand of a given stock which in turn leads to downward price pressure.

“It is not enough just to know who your largest or most active institutional investors are,” said Bill Sherman, executive vice president of Thomson Financial’s Corporate Group. “What is critical is to identify the style of the ‘dominant’ investors — those who are most sensitive to the company’s performance and moves — and evaluate the company’s performance against their investment criteria.”

To measure the fit between the preferences of a company’s dominant institutional investors and the company’s financial performance, the research partners developed a quantitative tool – the Investor Alignment Index. Using three sample industries, they found empirical evidence that strongly correlated a company’s score on the index and its relative valuation: companies with low scores on the Alignment Index (i.e., low alignment between performance and investor preferences) regularly have lower valuations (relative to their fundamentals) than companies with high scores.

The authors of the study believe that the developed approach can be applied in many practical situations, for instance, to uncover the sources of undervaluation (or overvaluation), to anticipate the impact of key strategic moves on the company’s stock price, or to identify those investor segments that are consistent with a company’s long-term strategy and aspirations. The index can also be used as a quantitative measure of the company’s investor relations function.