Using management buzzwords leads to company overvaluation Thursday, 26 May 2016

Just-in-time, outsourcing and big data? These are the trendy buzzwords that companies latch onto when it comes to adopting new management practices. New research by Patrick Reinmoeller and Jurriaan Nijholt of Rotterdam School of Management, Erasmus University (RSM) and Pieter-Jan Bezemer of QUT Business School reveals that even without needing to adopt the practice, merely using buzzwords that are in fashion can lead to companies being overvalued.

Security analysts carefully weigh every bit of information about a company to accurately calculate how much it may be worth, and translate that into a corresponding expected performance. These evaluations then can influence the stock price, explains Patrick Reinmoeller. The research team was interested to see how much ‘keeping up an appearance’ as a progressive company would influence the company’s stock price. To find out, they looked for how many times a subset of publicly listed US companies were associated with trends in management in Wall Street Journal articles between 1992-2008.

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.

Patrick Reinmoeller is professor of Strategic Management at Cranfield University and visiting faculty at Rotterdam School of Management, Erasmus University (RSM).

The paper: Nijholt, Jurriaan Jacobus and Bezemer, Pieter-Jan and Reinmoeller, Patrick, Following Fashion: Visible Progressiveness and the Social Construction of Firm Value (October 29, 2015) has been published in Strategic Organization.

Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s leading business schools, and ranked among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in Chengdu, China, and Taipei, Taiwan. www.rsm.nl

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