Are Good Companies Bad Investments?

August 1998

40 Pages Posted: 23 Mar 2000

See all articles by Peter Antunovich

Peter Antunovich

Morgan Stanley Dean Witter & Co. Inc.

David Laster

Swiss Re Economic Research & Consulting

Date Written: FRB of New York Staff Report No. 60

Abstract

Do investors confuse the quality of a firm with its attractiveness as an investment? If so, shares of well-run companies will be bid up too high and subsequently earn negative abnormal returns. Our analysis of Fortune magazine?s annual survey of "America's Most Admired Companies" for 1983-96 finds the opposite. A portfolio of the most admired decile of firms earns an abnormal return of 3.2 percent in the year after the survey is published and 8.3 percent over three years. The least admired decile of firms earns a negative abnormal return of 8.6 percent in the nine months through the end of the year, more than half of which is reversed in the first quarter of the following year. The magnitude of these abnormal returns and their persistence over five years suggest that well admired firms are not overpriced. The timing of returns to least admired firms provides evidence of window dressing.

JEL Classification: G11, G12, G14

Suggested Citation

Antunovich, Peter and Laster, David, Are Good Companies Bad Investments? (FRB of New York Staff Report No. 60). August 1998, Available at SSRN: https://ssrn.com/abstract=163153 or http://dx.doi.org/10.2139/ssrn.163153

Peter Antunovich

Morgan Stanley Dean Witter & Co. Inc. ( email )

1585 Broadway
New York, NY 10036
United States

David Laster (Contact Author)

Swiss Re Economic Research & Consulting ( email )

55 East 52nd St
New York, NY 10055
United States
(212) 317-5587 (Phone)
(212) 317-5455 (Fax)

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