Using management buzzwords leads to company overvaluation

Just-in-time

In the 1980s, companies liked to give the impression they were incorporating ‘just-in-time’ into their management practices, Reinmoeller says, while in the 1990s ‘outsourcing’ came into vogue. To give a progressive impression today probably requires portraying the company as ‘agile’ and leveraging ‘big data’, the researcher continues. Since it was the appearance of being fashionable the researchers were interested in, only associations with management practices in newspaper articles were counted in the study. Companies did not have to translate these trends into actual management behaviour to be included in the study, Reinmoeller says.

Overvaluation

The researchers then compared the company’s long-term earnings-per-share, as projected by analysts, with its actual earnings-per-share. The results showed that firms appearing progressive by associating themselves with a management trend were frequently overvalued by security analysts. This study shows that appearing progressive creates exaggerated positive expectations of future earnings-per-share, Reinmoeller says.

By contrast, firms that followed too many management fashions were less highly valued by analysts compared to their real performance, the researchers found. Claiming the company is innovative and progressive in too many ways creates confusion, and is just not very believable, the researcher explains.

Language matters

Reinmoeller points out that this study shows being associated with management trends can have a big impact on the company’s valuation. He advises companies to be aware that the image it projects in the media will always be compared with commonly held expectations of what a progressive company ought to be. By carefully adapting language to reflect these ‘norms of progress’, a company can manage how progressive it wants to appear. This will give it additional control over how it is valued by analysts, Reinmoeller concludes.