Newswise — Companies enjoying a strong reputation or celebrity status reap greater market returns for positive earnings surprises, according to a new study. They also experience less market punishment for negative surprises.
"Reputation or celebrity can significantly benefit a firm when unexpected good or bad news happens," reports Dr. Michael D. Pfarrer, assistant professor in the Daniels College of Business at the University of Denver.
Investors have clearer expectations for companies with high reputation and celebrity. Positive surprises can confirm and enhance those expectations. With negative surprises, Dr. Pfarrer says investors may have a "reservoir of good will" for such firms, which buffers their reactions.
"In turbulent times, high levels of firm reputation or celebrity can provide a little more assurance for stakeholders amid unexpected events. The investors may be better able to sleep at night."
The study, "Does Noblesse Oblige? The Effects of Firm Reputation and Celebrity on Earnings Surprises and Investors' Reactions," was recognized in the Academy of Management's prestigious 2008 Best Paper Proceedings. Dr. Pfarrer's coauthors were Dr. Timothy G. Pollock of Pennsylvania State University and Dr. Violina P. Rindova of the University of Texas.
Firms with strong reps show consistency and reliability in their actions. They are the tried and true, the steady and dependable. Celebrity firms are media darlings. They are generally nonconformist in their strategies. Narratives of their exciting exploits appear in the media, generating public interest and downright affection for these firms. They are the rock stars of the corporate world.
"Celebrity firms generate positive emotional resonance. They strike a chord. They make us feel good," Dr. Pfarrer says.
Examples of high-reputation firms include Berkshire Hathaway, Toyota, and Xerox. Celebrity firms include Amazon, Apple, eBay, Starbucks, and Yahoo.
The researchers examined 291 public companies over the period of 1991-2005. First, the 80 high-reputation firms listed among Fortune magazine's "most admired companies" and the Wall Street Journal's top 25 rankings were matched in characteristics such as size and assets with other firms having neither high reputation nor celebrity. Celebrity firms were chosen for having the most articles with the greatest positive emotional content appear in Business Week.
Financial information, extracted from Thompson Financial's I/B/E/S database, included earnings and analysts' mean forecasts for each firm during every year of the study period. To isolate the impact of firm reputation and celebrity on material earnings surprises, only the largest 25 percent of positive and negative earnings surprises by industry were examined for each year.
Firms with high reputations were found to be 32 percent less likely to produce positive earnings surprises than celebrity firms and those without high reputations. Reputation, however, did not seem to affect the occurrence of negative surprises.
Regarding celebrity, there were no significant differences in the overall numbers of surprises between those with celebrity and those without.
Other findings were that investors responded even more positively to positive surprises by celebrity firms than to similar surprises from high-reputation firms. Celebrity firms outperformed their high-reputation counterparts by 1.02 percent in the three-day window immediately surrounding earnings announcements.
The study refers to earnings surprises as "deviant behavior." Stock analysts commonly receive forecasting guidance from the firms themselves, so material surprises are relatively rare and violate stakeholders' preconceptions. Material surprises are defined as those that differ from expectations by a significant amount.
"Despite companies' best efforts to guide earnings, surprises still happen," says Dr. Pfarrer. "Earnings surprises interfere with the expectations of the market. When they occur, the firm's characteristics or how the firm is perceived can affect how the market responds."
RSS