Stock Returns Of Admired Companies And Spurned Ones by CSInvesting
University of Michigan
Glenn Klimek Professor of Finance
Santa Clara University
Leavey School of Business
Santa Clara, CA 95053
Do stocks of admired companies yield admirable returns? Are increases in admiration followed by high stock returns? And how reliable is the relation between admiration and returns? These are the questions we answer in this paper. We study Fortune magazine’s annual list of “America’s Most Admired Companies” and find that stocks of admired companies had lower returns, on average, than stocks of spurned companies from April 1983 through December 2007. Moreover, we find that increases in admiration were followed, on average, by lower returns. We also find that the dispersion of stock returns is high, especially in the spurned portfolio. This implies that investors who want to benefit from the return advantage of spurned stocks must diversify widely among them.
Stocks of admired companies and spurned ones – Introduction
Past studies on the relation between reputation and subsequent returns reached inconsistent conclusions. Clayman (1987, 1994) conducted two studies of the stock returns of companies labeled excellent in Peters and Waterman’s “In Search of Excellence” (1982). In the first she found that stocks of excellent companies had relatively low subsequent returns but in the second she found that they had relatively high returns. Anderson and Smith (2006) and Antunovich, Laster and Mitnick (2000) found that stocks of companies ranked high by Fortune had higher subsequent returns than stocks that ranked low. But Shefrin and Statman (2003) and Statman, Fisher and Anginer (2008) found that they did not. The latter two studies focused on the perceptions of Fortune respondents rather than on opportunities available to investors, so returns were measured from the time surveys were conducted, rather than from the time they were published. In this study we focus on returns available to investors who find the ratings of companies when they are published in Fortune, months after the surveys were conducted.
We study Fortune surveys published during 1983-2007 and returns through December 2007, a period longer than in earlier studies. We find that stocks of spurned companies, namely those with relatively low Fortune ratings, beat stocks of admired companies, namely those with relatively high ratings. Further, we find that increases in ratings from one year to the next were followed by relatively low subsequent returns. The higher stock returns of spurned companies are statistically significant in the CAPM equation but not in the four-factor model and we discuss that relation between Fortune ratings and the factors of beta, book-to-price ratios, market capitalization, and momentum. We also find that the dispersion of returns among stocks was high, especially among stocks of spurned companies. This implies that investors who hope to capitalize on possibly better performance of stocks of spurned companies must diversify widely among them.
Fortune has been publishing the results of annual surveys of company reputations since 1983 and the survey published in March 2007 included 587 companies in 62 industries. Fortune asked more than 3,000 senior executives, directors and securities analysts to rate the ten largest companies in their own industries on eight attributes of reputation, using a scale of zero (poor) to ten (excellent): quality of management; quality of products or services; innovativeness; long-term investment value; financial soundness; ability to attract, develop, and keep talented people; responsibility to the community and the environment; and wise use of corporate assets. The rating of a company is the mean rating on the eight attributes. The list of admired companies in the 2007 survey includes Walt Disney, UPS and Google, with ratings of 8.44, 8.37 and 8.07. The list of spurned companies includes Jet Blue, Bridgestone and Stanley Works, with ratings of 5.25, 5.34 and 5.37.
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