Events at CERGE-EI

Prof. Stephen Ferris

University of Missouri, Columbia, Missouri, USA

Authors: Pratik Kothari, Don Chance, and Stephen Ferris

Abstract: We examine a sample of S&P 500 firms over the period 1999-2014 that publicly characterize their annual performance with extreme positive words, such as “outstanding” or “exceptional.”  We find that over the previous year, only about 18% of these firms generated positive abnormal returns, thereby adding to shareholder wealth, while about 70% had insignificant abnormal returns, and the remaining 12% of the firms produced negative abnormal returns, thereby destroying value.  Firms with insignificant abnormal returns have very high raw returns, suggesting that they could be crediting themselves with systematic performance.  We find that outperformance in accounting measures seems to motivate such statements, with the effect being less prominent with positive-significant CAR firms.  In comparison to a matched set of firms that did generate increases in shareholder wealth but did not make such statements, our sample firms show stronger industry-adjusted free cash flow growth.  Our results suggest a concern that the overwhelming majority of companies do not understand shareholder wealth or they disregard the question of whether they have increased it.

Full Text:  “Brag, Brag, Brag: Corporate Crowing and Shareholder Wealth”