CEOs are not the most trustworthy figures in society. They will lay off thousands of employees to beat analysts' estimates, and yet they have no trouble looting the stock to pay themselves millions while the company loses money. However, one theme that keeps coming up is that unethical behavior has a price tag. Layoffs do not always boost the stock price. Treating people as expenses instead of assets does not pay off in the long run. Corruption is a drag on stock performance. Now, a new study shows that CEOs who lie about poor performance end up crashing their company's stock.
Stephen Ferris, Don Chance, and James Cicon wrote a paper called, "Poor Performance and the Value of Corporate Honesty," which will be published in the next issue of the Journal of Corporate Finance. The authors scanned press releases for words like "apologize" and "regret" to find negative reports. They reviewed 150 company announcements from 1993 through 2009 when the company reported poor performance. When companies blamed external factors, they usually provided vague explanations. When they admitted mistakes, they used specific phrases like "bad acquisitions strategy," "accounting errors," and "manager mistakes."
Two-thirds of the announcements attributed the poor performance to external forces. The authors were careful to assess relative performance to account for industry-wide downturns. The University of Missouri reports,
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