The Announcement and Long-Term Effects of Hiring a Management Consulting Firm
48 Pages Posted: 19 Aug 2003
Date Written: June 26, 2003
Despite the prominence of management consulting firms, there is little systematic evidence in the finance and economic literature of their impact on corporate performance. This paper assembles a unique dataset of companies that announce their relationships with a management consulting firm between 1991 and 2001. Stock returns fall by an average of 4.3 percentage points relative to the market when an announcement is made. The median price drop is 1.6 percentage points. In a longer-term analysis, the intercepts from a Fama-French four-factor model show that announcing companies earn negative risk adjusted returns prior to their announcements. Risk adjusted returns are significantly higher after the announcement, with the total risk adjusted return peaking at 1.3 percentage points per month approximately three years after the announcement. In addition, we show that the companies that announce a relationship with a management consultant tend to under perform their competitors before hiring and then begin to outperform them after two years. Average employment growth turns sharply negative in the years following the announcement; however, the positive risk-adjusted returns are only weakly correlated with employment contractions in the cross-section of announcement companies.
Keywords: Consultant, Event study, Multifactor model
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation