STOCK PRICE REACTION TO SUPPLY CHAIN MANAGEMENT ADVERTISEMENTS AND COMPANY VALUE, THE

Journal of Business Logistics, 2005 by Filbeck, Greg, Gorman, Raymond, Greenlee, Timothy, Speh, Thomas

INTRODUCTION

Supply chain management has been hailed in the popular and academic presses as a cost saving and value-creating process (e.g., Challener 1999; Chapman, Ettkin, and Helms 2000). It is also seen as a critical driver of share holder value and competitive differentiation (D'Avanzio, von Lewinski, and Van Wessenhove 2003). Universities have begun offering majors and minors in supply chain management with close to six figure starting salaries for MBAs in this area (Francis 2000). Companies that adopt supply chain management are often viewed as industry leaders employing best in practice management techniques. Those companies that adopt supply chain management are possibly deserving of some praise; however, it is unclear whether the market perceives such practice as being "value added." While several studies document lower costs and higher profits from supply chain management, they have not clearly documented whether they create value for their shareholders (Quinn 2000). Effective management of the supply chain can create cost reduction and sales expansion opportunities, and both of these results should translate to higher profits and greater shareholder value. The problem is linking supply chain activities to increased company value. It would stand to reason that as firms become more sophisticated and adept in managing supply chain activities, then the results should be reflected in the value that investors place on the company's stock. In this paper, we examine the stock price reaction to announcements that a firm has adopted tools, techniques, and processes that are linked to creating supply chain efficiencies and enhancing customer service. The adoption of supply chain-enhancing tools is evidenced in this study by a given company being specifically cited by providers of supply chain technology, software, and systems. The citations appear in supply chain and logistics publications and trade magazines via press releases or advertisements. For example, when a provider of RFID technology issues a press release that is carried in a supply chain publication stating that Firm 'X' has installed the RFID throughout their system, this event becomes part of our sample. In this study, we also investigate the extent to which the strength of the stock price reaction is affected by the certainty of the publication date of the periodical.

MOTIVATION AND LITERATURE REVIEW

The Link between Managerial and Financial Performance

The inference by investors that well-managed companies (e.g., in this study, those adopting supply chain management systems, software, and technology) are excellent investment opportunities is something that market analysts have previously observed and often cautioned against (Arnott 1983; Bernstein 1956). Among the first to sound this warning to investors was Bernstein (1956) who studied whether firms categorized as "growth companies" were in fact "growth stocks." Based on a sample of 33 firms, Bernstein's conclusion was that "superior financial results are apparently not the fortuitous outcome of being a member of a growth company." Arnott ( 1983) argued that a company's high stock price can be attributed to the market's assessment of the perceived risk of a firm. In particular, Arnott found that the long-term performance is a result of investing in companies that are viewed as being high risk.

Studies (dayman 1987; Kolodny, Laurence, and Ghosh 1989) of companies described by Peters and Waterman (1982) in their best selling book as excellent concluded that the "excellent" firms did not outperform the overall stock market, or a control sample of similar firms, and that investors could not achieve excess returns with ex-ante information about the excellent firms. It can also be noted that some of these excellent companies have since gone out of business.

Other studies have found that investing in well-managed companies can result in abnormal risk adjusted returns. For example, Filbeck, German, and Preece (1997) found that an investor holding a well-diversified portfolio can earn superior returns by investing in Fortune's most admired firms. They also demonstrated that both the raw and risk adjusted returns of most admired firms were significantly higher than the returns on the companies with the lowest ranking in the Fortune survey. Similar results were also found by Filbeck and Preece (1995) who showed that an investor can outperform the British stock market with a portfolio of stocks from the Economist's most admired list.

More recently, Filbeck and Gorman (2000) evaluated the investment performance of the companies that are "Built to Last," as determined by Collins and Porras (1994). Filbeck and Gorman found that the companies deemed visionary by Collins and Porras did outperform both the market and a portfolio of less visionary companies prior to 1989 when Collins and Porras made their assessment of which companies are "Built to Last." However, in the years following this assessment, the visionary companies failed to outperform the market.