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Is Management Quality Value Relevant?
Author(s) -
Agarwal Vineet,
Taffler Richard,
Brown Mike
Publication year - 2011
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2011.02267.x
Subject(s) - profitability index , equity (law) , earnings management , business , earnings , quality (philosophy) , market value , value (mathematics) , economics , actuarial science , microeconomics , financial economics , finance , philosophy , epistemology , machine learning , political science , computer science , law
Using a unique database of management quality ratings over a 17 year period, we find that while good management appears to be associated with lower subsequent market returns, this is entirely consistent with an informationally efficient market. Quality of management is value relevant in that better managed firms have lower cost of equity, more stable earnings, higher profitability that persists over time, and higher market valuations using the Ohlson (1995 and 2001) method. Potentially endogenous relationships are unlikely to be driving our results. While well managed firms are ‘good firms’, contrary to the belief of many market participants their stocks perform no better than those of poorly managed firms.